UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 


SCHOOL  OF  LAW 
LIBRARY 


RAILROADS 

RATES  AND  REGULATION 


BY  THE  SAME  AUTHOR 


RAILROADS 

FINANCE  AND   ORGANIZATION 


8vo.  Pages  xx  +  638,  with  Index.    $3.00  Net 
TABLE  OF  CONTENTS 

CHAPTER 

I  Railroad  Construction  Finance. 

II  Capital  and  Capitalization. 

Ill  Railroad  Securities:  Capital  Stock,  etc. 

IV  Railroad  Securities:  Mortgage  Indebtedness,  etc. 

V  The  Course  of  Market  Prices. 

VI  Speculation. 

VII  Stock-Watering. 

VIII  Stock- Watering  (continued). 

IX  State  Regulation  of  Security  Issues. 

X  The  Determination  of  Reasonable  Rates. 

XI  Physical  Valuation:  Reasonable  Rates. 

XII  Receivership  and  Reorganization. 

XIII  Intercorporate  Relations. 

XIV  Combination:  Eastern  and  Southern  Systems. 
XV  RaUroad  Combination  in  the  West. 

XVI  The  Anthracite  Coal  Arrangement. 

XVII  Dissolution  under  the  Anti-Trust  Law. 

XVIII  Pooling  and  Inter- Railway  Agreements. 


LONGMANS,   GREEN,   AND   CO. 


RAILROADS 

RATES  AND  REGULATION 


BY 

WILLIAM    Z.   RIPLEY,   Ph.D. 

Nathaniel  Ropes  Professor  of  Economics  In  Harvard  Universitt 


WITH  41  MAPS  AND  DIAGRAMS 


New  Impression 


LONGMANS,    GREEN    AND    CO. 

FOURTH  AVENUE  &  30th  STREET,  NEW  YORK 

39  PATERNOSTER  ROW,  LONDON 

BOMBAY,  CALCUTTA,  AND  MADRAS 

1916 


COPYRIGHT,    1912,   BY 
IiONGMANS,    GREEN,    AND    CO. 


Published,  November,  1912 
Reprinted,  November,  1913 
September,  1916 


T 


-2^  -^  r 


n'^ 


THK'PLIMPTOIf'PRBSS 

[  W  •  I)  •  O  ] 
KORWOOD-MASS-U'S'A 


PKEFACE 

This  treatise  is  the  outcome  of  a  continuous  personal 
interest  in  railroads,  practically  coincident  in  point  of  time  with 
the  period  of  active  participation  of  the  Federal  governnlent 
in  their  affairs.     Durmg  these  years,  since  1887  when  the  Act 
^    to  Regulate  Commerce  was  passed,  as  the  problem  of  pubHc 
regulation    has   gradually   unfolded,   opportunity   has  offered 
-^   itself  to  me  to  view  the  subject  from  different  angles.     At  the 
H    Massachusetts  Institute  of  Technology,  as  instructor  of  embryo 
—^  engineers  in  the  economic  aspects  of  their  callings;   in  service 
for  the  United  States  Industrial  Commission  in  1900-01,  in 
touch  aUke  with  government  officials  and,  travelling  all  about 
the  country,  with  shippers  and  conunercial  bodies  during  a 
period  of  acute  imresf;    and  finally  ripening  the  practical  ex- 
perience, thus  gained,  in  the  favoring  atmosphere  of  Harvard 
University,  seeking  to  imbue  future  citizens  with  a  sense  of 
their  civic  responsibilities;    through  all  these  years,  the  con- 
viction has  steadily  grown  that,  as  one  of  the  most  fundamental 
agents  in  our  American  economic  affairs,  the  subjection  of  trans- 
portation to  pubfic  control  was  a  primary  need  of  the  time. 
An  earnest  effort  has  been  made  to  set  dowTi  the  facts  concem- 
mg  this  highly  controversial  subject  with  scientific  rigor  and  with 
fairness  to  all  three  of  the  great  parties  concerned,  the  owners, 
the  shippers  and  the  people.    If  bias  there  be,  it  will  m  all  fikeli- 
hood  be  found  to  favor  the  welfare  of  the  "  dim  inarticulate 
multitude," — that  so  inert  mass  of  interests  and  aspu-ations, 
too  indefinitely  informed  as  to  details  and  too  much  occupied 
in  earning  its  daily  bread,  to  be  able  to  analyze  its  own  vital 
concerns,  to  give  expression  to  its  will,  and  even  sometimes,  as 
it  seems,  wisely  to  choose  its  spokesmen  and  representatives. 


vi  PREFACE 

It  is  this  helpless  and  unorganized  general  public,  always  in 
need  of  an  advocate,  which,  perhaps,  most  strongly  appeals  to 
the  academic  mind.  If  there  be  lack  of  judicial  poise  in 
this  regard,  it  is,  at  all  events,  palliated  by  free  confession  in 
advance. 

Nor  is  the  history  of  the  assumption  by  public  authority  of 
its  inherent  right  to  control  railroads,  as  narrow  an  interest 
as  it  at  first  appears.  Transportation,  as  a  service,  is  the 
commodity  produced  by  common  carriers.  The  manner  in 
which  the  price  of  this  commodity  has  been  brought  under 
governmental  regulation  has  a  direct  bearing  upon  another 
problem  just  beginning  to  open  up;  namely  that  of  the  con- 
trol by  the  state  of  the  prices  of  other  things.  It  is  not 
unhkely,  in  my  judgment,  that  the  final  solution  of  the  so- 
called  Trust  Problem  in  the  United  States,  whether  for  good 
or  ill,  may  ultimately  contain  as  one  important  feature,  the 
determination  by  governmental  authority  of  reasonable  prices 
for  such  prime  necessities  of  life  as  milk,  ice,  coal,  sugar  and 
oil,  when  produced  under  monopolistic  conditions.  This  view 
is  shared  by  my  colleague  Professor  Taussig  in  his  "Principles 
of  Economics."  It  is  also  distinctly  set  forth  by  President 
Van  Hise  of  the  University  of  Wisconsin,  in  his  recent  "  Con- 
centration and  Control."  When  the  seed  of  such  an  industrial 
policy  is  planted,  as  I  believe  it  possible  in  time,  the  soil  will 
have  been  richly  prepared  for  its  reception  by  our  experience 
in  the  determination  of  reasonable  charges  for  the  services  of 
railroads  and  other  public  utihties. 

A  word  of  explanation  may  also  be  offered  to  the  reader 
who  finds  in  these  pages  an  almost  exuberant  mass  of  illustra- 
tive material.  Possibly,  even,  it  may  be  alleged  that  in  places 
so  thick  are  the  circumstantial  trees  of  evidence  that  one  can 
scarcely  perceive  the  wood  of  principle.  But,  under  the  cir- 
cumstances, it  is  almost  inevitable  that  this  should  be  so.  The 
method  of  inquiry  adopted  has  been  mainly  inductive.  Text 
books  and  theoretical  treatises  have  been  used  only  by  the  way. 
I  hold  them  to  be  merely  of  secondary  importance.  The 
principal  reliance  has  been  upon  concrete  data,  painstakingly 


PREFACE  ^ii 

gathered  through  many  years  from  original  sources.  In  this 
present  excursion  in  the  far  more  complex  domain  of  the  social 
sciences,  an  endeavor  has  been  made  to  adhere  strictly  to  the 
same  scientific  method  pursued  in  the  field  of  natural  science  in 
writing  "The  Races  of  Europe."  A  search  far  and  -wade  for 
every  possible  bit  of  raw  material  had  to  be  made  at  the  outset. 
To  this  succeeded  the  classification  and  reahgnment  of  the 
concrete  data  thus  obtained.  The  last  step  of  all,  was  the 
formulation  of  the  governing  economic  principles.  But  an 
almost  indispensable  result  of  this  mode  of  work  is  a  plenitude 
of  reference  and  example.  One  might  almost  say  that  under 
such  circumstances  it  becomes  second  nature  to  demand  con- 
crete illustration  for  every  economic  theory  or  principle  laid 
down.  Such  a  statement,  however,  would  be  fallacious.  It 
would  misrepresent  the  true  sequence  of  events  as  above  out- 
lined. Rather  should  it  be  affirmed,  that,  inasmuch  as  the 
concrete  examples  are  the  sources  of  the  reasoning,  no  theory 
can  be  held  valid  for  which  somewhere  or  somehow,  positive 
illustration  drawn  from  practice  cannot  be  found.  Such  an 
ideal  is,  indeed,  difficult  to  attain;  but  it  may  be  stated  as  a 
cardinal  principle  to  be  always  kept  in  mind.  And  it  ought 
to  excuse  an  author  from  the  charge  of  over-elaboration  of 
detail  in  illustration.  The  only  crunes  for  which  no  verbal 
atonement  will  suffice  are  that  the  chosen  illustration  does  not 
fit  the  principle,  or  else  that  the  facts  have  been  distorted  to 
serve  a  preconceived  idea. 

References  throughout  this  work  to  a  second  volume  will  be 
noted.  This  will  deal  primarily  with  matters  of  finance  and 
corporate  relations.  The  general  subject  of  railroad  combina- 
tion was  necessarily  relegated  to  another  set  of  covers.  This, 
however,  is  quite  fitting,  inasmuch  as  the  connection  between 
matters  of  finance  and  organization  is  at  all  times  so  intimate 
and  necessary.  The  development  of  inter-railway  relationships 
has  been,  perhaps,  next  to  the  establishment  of  government 
regulation,  the  most  striking  phenomenon  of  the  last  decade. 
It  is  absolutely  essential  to  a  comprehension  of  present  day 
financial  problems,  to  understand  the  nature  and  extent  of  the 


viii  PREFACE 

consolidation  of  interests  which  obtains.  This  second  volume, 
now  nearly  completed,  will,  it  is  hoped,  appear  early  in  1913. 
This  volume  is  also  frequently  linked  by  means  of  cross 
references  to  a  set  of  reprints  of  notable  interstate  commerce 
cases  or  special  articles  which  was  published  some  years  ago 
as  "Railway  Problems."  (Ginn  &  Co.)  Much  new  material 
having  accumulated  since  its  original  appearance  in  1907,  it 
is  the  intention  to  prepare  a  new  and  revised  edition,  par- 
ticularly designed  as  an  accompaniment  to  this  treatise.  But 
the  same  chapter  numbers  will  be  preserved  for  all  material 
taken  over  from  the  first  edition. 

Many  friends  and  specialists,  who  shall  be  unnamed,  have 
been  of  assistance  in  various  ways  for  which  I  am  duly  grateful. 
But  a  few  have  been  so  peculiarly  helpful  that  it  is  fitting  to 
make  more  particular  mention  of  my  personal  obligation.  Es- 
pecially is  this  true  of  Hon.  Balthasar  H.  Meyer  of  the  Inter- 
state Commerce  Commission,  from  whom  through  many  years 
of  friendship  and  common  interest  in  the  subject,  have  come 
all  sorts  of  aid  and  suggestion.  Prof.  F.  H.  Dixon  of  Dart- 
mouth College,  Statistician  of  the  Bureau  of  Railway  Economics 
at  Washington,  also  a  co-worker  in  the  same  field,  has  always 
without  reserve  freely  shared  the  best  he  had  to  give.  I  have 
drawn  hberally  from  his  special  contributions  on  transporta- 
tion, particularly  in  the  history  of  recent  Federal  legislation. 
Despite  the  difference  in  our  point  of  view,  the  always  friendly 
criticism  of  Frederic  A.  Delano,  President  of  the  Wabash 
Railroad,  has  been  most  welcome  and  serviceable.  In  matters 
of  classification,  Mr.  D.  O.  Ives,  Traffic  Expert  of  the  Boston 
Chamber  of  Commerce,  has  extended  a  helping  hand.  And  I 
have  profited  greatly  from  the  published  work  of  Mr.  Samuel 
0.  Dunn,  now  Editor  of  the  Railway  Age  Gazette.  In  this 
connection,  acknowledgment  should  be  made  of  my  deep  obli- 
gation to  the  other  editors  of  that  admirable  technical  journal, 
who  have  in  series  during  a  number  of  years  afforded  me  an 
opportunity  of  reaching  a  class  of  readers  and,  it  should  be 
added,  not  infrequently  of  unsparing  critics,  whose  intelligence 
and  technical  knowledge  have  held  me  to  a  strict  accounting 


PREFACE  ix 

in  all  matters  of  fact  or  principle.  Without  this  critical  over- 
sight, many  statements,  happily  now  tested,  would  have  held 
less  secure  place.  Then  again,  there  is  the  entire  staff  of  the 
Interstate  Commerce  Commission  to  whom  I  have  been  a  care 
and  trouble  for  so  many  years.  Ungrudgingly  have  its  mem- 
bers always  given  response  to  all  sorts  of  requests,  whether 
for  documents,  statistics  or  opinions.  Without  the  official 
stores  of  information  at  Washington,  this  present  volume  would 
have  been  woefully  incomplete. 


CONTENTS 


CHAPTER  I 

THE   HISTORY   OF   TRANSPORTATION   IN   THE 
UNITED   STATES 

Significance  of  geographical  factors,    1. — Toll  roads  before    1820,   2. — 

The    "National   pike,"    3.  —  Canals  and   internal  water- ways  before 

1830,    4.  — The    Erie    Canal,    4.  — Canals    in    the   West,   6.  — First 

railroad  construction  after  1830,  7.  —  Early  development  in  the  South, 

,  9.  —  Importance  of  small  rivers,  10. 

The  decade  1840-1860,  11.  —  Slow  railway  growth,  mainly  in  the  East, 
12.  —  Rapid  expansion  1848-1857;  western  river  traffic,  13.  —  Need 
of  north  and  south  railways,  14.  — -  Traffic  still  mainly  local,  15.  — 
Effect  of  the  Civil  War,  16.  —  Rise  of  New  York,  17.  — Primitive 
methods,  17. 

The  decade  1870-1880,  18.  —  Trans-Mississippi  development,  18.  — 
Pacific  Coast  routes  opened,  19.  —  Development  of  export  trade  in 
grain  and  beef,  20.  —  Trunk  line  rate  wars,  21.  —  Improvements  in 
operation,  23.  —  End  of  canal  and  river  traffic,  24. 

The  decade  1880-1890,  27.  —  Phenomenal  railway  expansion,  28.  —  Trans- 
continental trade,  28.  —  Speculation  rampant,  29.  —  Growth  of  western 
manufactures,  30.  —  Rise  of  the  Gulf  ports,  31. —  Canadian  competi- 
tion, 33.  —  General  resum6  and  forecast,  34. 

Public  land  grants,  35.  —  Direct  financial  assistance,  37.  —  History  of 
state  aid,  39.  —  Federal  experience  with  transcontinental  roads,  40, 


CHAPTER   II 

THE  THEORY  OF  RAILROAD   RATES 

Analysis  of  railroad  expenditures,  44.  —  Constant  v.  variable  outlays,  45. 
—  Fixed  charges,  46.  —  Official  grouping  of  expenses,  46.  —  Variable 
expenses  in  each  group,  51.  —  Peculiarities  of  different  roads  and  cir- 
cumstances, 56.  —  Periodicity  of  expenditures,  61.  —  Joint  cost,  67.  — 
Separation  of  passenger  and  freight  business,  68. 


xii  CONTENTS 

CHAPTER    III 
THE   THEORY   OF   RAILROAD   RATES  {Continued) 

The  law  of  increasing  returns,  71.  — Applied  to  declining  traffic,  73.— 
Illustrated  by  the  panic  of  1907,  75.  —  Peculiarly  intensified  on  rail- 
roads, 76. 

Growth  of  mileage  and  traffic  in  the  United  States  since  1889,  77.  —  In- 
crease of  earnings,  79.  — Operating  expenses,  gross  and  net  income, 
80.  —  Comparison  with   earlier  decades,  85.  — Density  of  traffic,  86. 

—  Increase   of    train   loads,  88.  —  Limitations   upon   their   economy, 
92.  — Heavier  rails,  93.  — Larger  locomotives,  94.  — Bigger  cars,  95. 

—  Net  result  of  improvements  upon  efficiency  and  earning  power, 
97. 

The  law  of  increasing  returns  due  to  financial  rather   than  operating 

factors,  99. 

CHAPTER  IV 

RATE  MAKING   IN   PRACTICE 

Evolution  of  rate  sheets,  101. —  Terminal  v.  haulage  costs,  102. —  Local 
competition,  104.  —  What  the  traffic  will  bear,  107.  —  Trunk  hne  rate 
system,  111.  —  Complexity  of  rate  structure,  113.  —  Competition  of 
routes,  114.  —  Competition  of  facilities,  116.  —  Competition  of  mar- 
kets, 118.  —  Ever-widening  markets,  119.  —  Primary  and  secondary 
market  competition,  121. — Jobbing  or  distributive  business,  124. — 
Flat  rates,  127.  —  Mississippi-Missouri  rate  scheme,  128.  —  Relation 
between  raw  materials  and  finished  products,  134.  —  Export  rates  on 
wheat  and  flour,  135.  —  Cattle  and  packing-house  products,  139.  — 
Refrigerator  cars,  140.  —  By-products  and  substitution,  142.  —  Kansas 
corn  and  Minnesota  flour,  143.  —  Ex-Lake  grain  rates,  145. 

CHAPTER  V 
RATE   MAKING  IN   PRACTICE   (Continued) 

Effect  of  changing  conditions,  147.  —  Lumber  and  paper  rates,  148.  — 
Equalizing  industrial  conditions,  148.  —  Protecting  shippers,  149.  — 
Pacific  Coast  lumber  rates,  150.  —  Elasticity  and  quick  adaptation, 
152.  —  Rigidity  and  dehcacy  of  adjustment,  153.  —  Transcontinental 
rate  system,  154.  —  Excessive  elasticity  of  rates,  155.  —  More  stability 
desirable,  159.  —  Natural  v.  artificial  territory  and  rates,  159.  — 
Economic  waste,  159.  — Inelastic  conditions,  161. —  Effect  upon 
concentration  of  population,  162.  —  Competition  in  transportation 
and  trade  contrasted,  163.  —  No  abandonment  of  field,  165. 

Cost  V.  value  of  service,  166.  —  Relative  merits  of  each,  167. — Charg- 
ing what  the  traffic  will    bear,  169.  —  UndXily  high   and  low  rates, 


CONTENTS  xiii 

171.  —  D5mamic  force  in  value  of  service,  177.  —  Cost  of  service  In 
classification,  179.  —  Wisconsin  paper  case,  181.  —  Cost  and  value  of 
service  equally  important,  checking  one  another,  184. 

CHAPTER  VI 

PERSONAL   DISCRIMINATION 

Rebates  and  monopoly,  with  attendant  danger  to  carriers,  185.  —  Per- 
sonal discrimination  defined,  188.  —  Distinction  between  rebating  and 
general  rate  cutting,  188.  —  Early  forms  of  rebates,  189.  —  Underbill- 
ing,  underclassification,  etc.,  190.  —  Private  car  lines,  192.  —  More 
recent  forms  of  rebating  described,  195.  —  Terminal  and  tap-lines,  196.  — 
Midnight  tariffs,  197.  —  Outside  transactions,  special  credit,  etc.,  198. 

—  Distribution  of  coal  cars,  199.  —  Standard  Oil  Company  practices, 
200.  —  Discriminatory  open  adjustments  from  competing  centres,  202. 

—  Frequency  of  rebating  since  1900,  204-6.  —  The  Elkins  Law  of  1903, 
205.  —  Discrimination  since  1906,  207.  —  The  grain  elevation  cases, 
211.  —  Industrial  railroads  once  more,  212. 

CHAPTER  VII 
LOCAL   DISCRIMINATION 

Concrete  instances,  215.  —  Hadley's  oyster  case  not  conclusive,  217.  — 
Two  variants:  lower  long-haul  rates  by  the  roundabout  route,  as  in 
the  Hillsdale,  Youngstown,  and  some  Southern  cases,  221;  or  by  the 
direct  route,  as  in  the  Nashville-Chattanooga  and  other  southern 
cases,  225.  —  Complicating  influence  of  water  transportation,  232.  — 
Market  competition  from  various  regions,  a  different  case,  234.  —  The 
basing  point  (southern)  and  basing  hne  (Missouri  river)  systems,  238. 

—  Their  inevitable  instability  and  probable  ultimate  abandonment, 
242.  —  Postage-stamp  rates,  illustrated  by  transcontinental  tariffs, 
245.  —  Which  hne  makes  the  rate?  255.  —  Cost  not  distance,  deter- 
mines, 256.  —  Fixed  charges  v.  operating  expenses,  257.  —  Proportion 
of  local  business,  259.  —  Volume  and  stability  of  traffic  important,  261. 

—  Generally  the  short  line  rules,  but  many  exceptions  occur,  263. 

CHAPTER  VIII 

PROBLEMS  OF  ROUTING 

Neglect  of  distance,  an  American  peculiarity,  264.  —  Derived  from  joint 
cost,  265.  —  Exceptional  cases,  265.  —  Economic  waste  in  American 
practice,  268.  —  Circuitous  rail  carriage,  269.  —  Water  and  rail-and- 
water  shipments,  273.  —  Carriage  over  undue  distance,  277.  —  An  out- 
come of  commercial  competition,  278.  —  Six  causes  of  economic  waste, 
illustrated,  280.  —  Pro-rating  and  rebates,  281.  —  Five  effects  of  dis- 


xiv  CONTENTS 

regard  of  distance,  288.  —  Dilution  of  revenue  per  ton  mile,  289.  — 
Possible  remedies  for  economic  waste,  292.  —  Pooling  and  rate  agree- 
ments, 293.  —  The  long  and  short  haul  remedy,  295. 

CHAPTER  IX 
FREIGHT   CLASSIFICATION 

Importance  and  nature  of  classification  described,  300.  —  Classifications 
and  tariffs  distinguished,  as  a  means  of  changing  rates,  301.  — The 
three  classification  committees,  304.  —  Wide  differences  between  them 
illustrated,  305.  —  Historical  development,  306.  —  Increase  in  items 
enumerated,  309.  —  Growing  distinction  between  carload  and  less- 
than-carload  rates,  310.  —  Great  volume  of  elaborate  rules  and  de- 
scriptions, 312.  —  Theoretical  basis  of  classification,  314.  —  Cost  of 
service  v.  value  of  service,  315.  — •  Practically,  classification  based  upon 
rule  of  thumb,  319.  —  The  "spread"  in  classification  between  com- 
modities, 319.  —  Similarly  as  between  places,  320.  —  Commodity  rates 
described,  322.  —  Natural  in  undeveloped  conditions,  323.  —  Various 
sorts  of  commodity  rates,  324.  —  The  problem  of  carload  ratings,  325. 
—  Carloads  theoretically  considered,  326.  —  Effect  upon  commercial 
competition,  327.  —  New  England  milk  rates,  329.  —  Mixed  carloads, 
331.  —  Minimum  carload  rates,  322.  —  Importance  of  car  capacity, 
334.  —  Market  capacity  and  minimum  carloads,  336. 

Uniform  classification  for  the  United  States,  337.  —  Revival  of  interest 
since  1906,  339.  —  Overlapping  and  conflicting  jurisdictions,  340.  — 
Confusion  and  discrimination,  341. — Anomahes  and  conflicts  illus- 
trated, 342.  —  Two  main  obstacles  to  uniform  classification,  345.  — 
Reflection  of  local  trade  conditions,  345.  —  Compromise  not  satisfac- 
tory, 346.  —  Classifications  and  distance  tariffs  interlock,  347.  — 
General  conclusions,  351. 

CHAPTER  X 

THE  TRUNK  LINE  RATE   SYSTEM:     A   DISTANCE  TARIFF 

Conditions  prevalent  in  1875,  356.  —  Various  elements  distinguished, 
358. —  The  MacGraham  percentage  plan,  360.  — Bearing  upon  port 
differentials,  361.  — The  final  plan  described,  363.  —  Competition  at 
junction  points,  368.  —  Independent  transverse  railways,  370.  —  Com- 
mercial competition,  372.  —  Limits  of  the  plan,  375.  —  Central  Traffic 
Association  rules,  376. 

CHAPTER  XI 

SPECIAL  RATE  PROBLEMS:   THE  SOUTHERN  BASING  POINT 

SYSTEM;    TRANSCONTINENTAL  RATES;    PORT 

DIFFERENTIALS,  ETC. 

Contrast  between  the  basing  point  and  trunk  line  systems,  380.  —  Natural 
causes  in  southern   territory,   381.  —  Economic   dependence,   381. — 


CONTENTS  XV 

Wide-spread  water  competition,  382.  —  High  level  of  rates,  382.  — 
The  basing  point  system  described,  383.  —  Its  economic  defences,  384. 
—  Early  trade  centres,  384.  —  Water  competition  once  more,  385.  — 
Three  types  of  basing  point,  387.  —  Purely  artificial  ones  exemplified, 
388.  —  Different  practice  among  raikoads,  390.  —  Attempts  at  re- 
form, 391.  —  Western  v.  eastern  cities,  391.  —  Effect  of  recent  indus- 
trial revival,  392.  —  The  Texas  group  system,  393.  —  An  outcome  of 
commercial  rivalry,  394.  —  Local  competition  of  trade  centres,  395.  — 
Possibly  artificial  and  unstable,  395.  —  The  transcontinental  rate  sys- 
tem, 395.  —  High  level  of  charges,  396.  —  Water  competition,  396. — 
Carload  ratings  and  graded  charges,  398.  —  Competition  of  jobbing 
centres,  398.  —  Canadian  differentials,  400.  —  "Milling-in-transit" 
and  similar  practices,  401.  —  "Floating  Cotton,"  402.  —  "Substitution 
of  tonnage,"  403.  —  Seaboard  differentials,  403.  —  Historically  con- 
sidered, 403.  —  The  latest  decision,  403.  —  Import  and  export  rates, 
404-409. 


CHAPTER   XII 
THE  MOVEMENT  OF  RATES  SINCE   1870;    RATE  WARS 

Contrast  before  and  after  1900,  411.  — Revenue  per  ton  mile  data,  412. — 
Their  advantages  and  defects,  414.  —  Nature  of  the  traffic,  416.  — 
Low-grade  traffic  increasing,  416.  —  Growing  diversification  of  ton- 
nage, 418.  —  Present  conditions  illustrated,  419.  —  Length  of  the  haul, 
421.  —  The  proportion  of  local  and  through  business,  422.  —  Effect 
of  volume  of  traflac,  424.  —  Proper  use  of  revenue  per  ton  mile,  425.  — 
Index  of  actual  rates,  426.  —  Its  advantages  and  defects,  427.  — 
Difficulty  of  following  rate  changes  since  1900,  427.  —  Passenger  fares, 
429.  —  Freight  rates  and  price  movements,  430. 

Improvement  in  observance  of  tariffs,  431.  —  Conditions  in  the  eighties, 
432.  — The  depression  of  1893-1897,  433.  —  Resumption  of  prosperity 
in  1898,  436.  —  The  rate  wars  of  1903-1906,  438.  —  Threatened  dis- 
turbances in  1909-1911,  439. 


CHAPTER  XIII 

THE  ACT  TO  REGULATE  COMMERCE  OF  1887 

Its  general  significance,  441.  —  Economic  causes,  442.  —  Growth  of  inter- 
state traffic,  442.  —  EarUer  Federal  laws,  443.  —  Not  lower  rates,  but 
end  of  discriminations  sought,  443.  —  Rebates  and  favoritism,  445.  ^ 
Monopoly  by  means  of  pooling  distrusted,  446.  —  Speculation  and 
fraud,  447.  —  Local  discrimination,  448.  —  General  unsettlement  from 
rapid  growth,  449.  —  Congressional  history  of  the  law,  450.  —  Its 
constitutionaUty,  451.  —  Summary  of  its  provisions,  452.  —  Its  tenta- 
tive character,  453.  —  Radical  departure  as  to  rebating,  454. 


xvi  CONTENTS 

CHAPTER  XIV 

1887-1905.     EMASCULATION   OF  THE   LAW 

Favorable  reception,  456.  —  First  resistance  from  unwilling  witnesses 
concerning  rebates,  457.  —  Counselman  and  Brown  cases,  458.  — 
The  Brimson  case,  459.  —  Relation  to  Federal  Courts  unsatisfactory, 
460.  —  Interminable  delay,  461.  —  Original  evidence  rejected,  461. — 
The  Commission's  court  record  examined,  462.  —  Rate  orders  at  first 
obeyed,  467.  —  The  Social  Circle  case,  468.  —  Final  breakdown  in 
Maximum  (Cincinnati)  Freight  Rate  case,  469.  —  Other  functions 
remaining,  472.  —  The  long  and  short  haul  clause  interpreted,  474.  — 
The  Louisville  and  Nashville  case,  474.  —  The  "independent  line" 
decision,  476.  —  The  Social  Circle  case  again,  478.  —  "Rare  and 
peculiar  cases,"  479.  — The  Alabama  Midland  (Troy)  decision,  481.  — 
Attempted  rejuvenation  of  the  long  and  short  haul  clause,  483.  — 
The  Savannah  Naval  Stores  case,  484.  —  The  dwindUng  record  of 
complaints,  485. 

CHAPTER  XV 

THE   ELKINS   AMENDMENTS    (1903):    THE   HEPBURN   ACT 

OF   1906 

New  causes  of  unrest  in  1899,  487.  —  The  spread  of  consolidation,  487.  — 
The  rise  of  freight  rates,  488.  —  Concentration  of  financial  power,  490. 

—  The  new  "trusts,"  491.  —  The  Elkins  amendments  concerning 
rebates,  492.  —  Five  provisions  enumerated,  493. 

More  general  legislation  demanded,  494.  —  Congressional  history  1903-1905, 
495. — Railway  pubhcity  campaign,  496.  —  President  Roosevelt's  leader- 
ship, 498.  —  The  Hepburn  law,  499.  —  Widened  scope,  499.  —  Rate- 
making  power  increased,  500.  —  Administrative  v.  judicial  regulation, 
501.  —  Objection  to  judicial  control,  503.  —  Final  form  of  the  law,  505. 

—  Broad  v.  narrow  court  review,  506.  —  An  unfortunate  compromise, 
507.  —  Old  rates  effective  pending  review,  508.  —  Provisions  for 
expedition,  511.  —  Details  concerning  rebates,  512.  —  The  commodity 
clause,  513.  —  History  of  its  provisions,  514.  —  Publicity  of  accounts, 
515. — Extreme  importance  of  accounting  supervision,  516.  —  The 
Hepburn  law  summarized,  520. 


CHAPTER  XVI 

EFFECTS  OF  THE  LAW  OF   1906;    JUDICIAL 
INTERPRETATION,  1905-'10 

Large  number  of  complaints  filed,  522.  —  Settlement  of  many  claims,  524. 
—  Fewer  new  tariffs,  525.  —  Nature  of  complaints  analyzed,  526.  — 


CONTENTS  xvii 

Misrouting  of  freight,  527.  —  Car  supply  and  classification  rules,  527. 

—  Exclusion  from  through  shipments,  529.  —  Opening  new  routes, 
530.  —  Petty  grievances  considered,  530.  —  Decisions  evenly  balanced, 
532.  —  The  banana  and  lumber  loading  cases,  532.  —  Freight  rate 
advances,  534.  —  General  investigations,  536. 

Supreme  Court  definition  of  Commission's  authority,  538.  —  The  Illinois 
Central  car  supply  case,  538.  —  Economic  v.  legal  aspects  considered, 
540.  —  The  Baltimore  and  Ohio  decision,  541.  —  The  Burnham, 
Hanna,  Hunger  case,  542.  —  The  Pacific  Coast  lumber  cases,  543.  — 
Decisions  revealing  legislative  defects,  546.  —  The  Orange  Routing 
case,  546.  —  The  Portland  Gateway  order,  547.  —  The  Commission's 
power  to  require  testimony  affirmed,  549.  —  The  Baird  case,  549.  — 
The  "Immunity  Bath"  decision  and  the  Harriman  case,  550.  —  In- 
terpretation of  the  "commodity  clause,"  552.  —  Means  of  evasion 
described,  553. 

CHAPTER  XVII 

THE   MANN-ELKINS  ACT   OF   1910 

Prompt  acquiescence  by  carriers,  557.  —  Opposition  begins  in  1908,  557. 

—  Political  developments,  558.  —  President  Taft's  bill,  559.  —  Three 
main  features  of  the  new  law,  560.  —  Suspension  of  rate  changes,  561. 

—  Former  defective  injunction  procedure  remedied,  562.  —  The  new 
long  and  short  haul  clause,  564.  —  Provision  for  water  competition, 
566.  —  The  new  Commerce  Court,  566.  —  Congressional  debates,  567. 

—  Jurisdiction  of  the  new  Court,  568.  — •  Its  defects,  569.  —  Prosecution 
transferred  to  the  Department  of  Justice,  570.  —  LiabiUty  for  rate 
quotations,  571. — Wider  scope  of  Federal  authority,  572. — The 
Railroad  Securities  Commission,  573  —  Its  report  analyzed,  574.  — 
The  statute  summarized,  578. 


CHAPTER  XVIII 

THE  COMMERCE  COURT:    THE  FREIGHT  RATE  ADVANCES 

OF  1910 

The  Commerce  Court  docket,  581.  —  The  Commerce  Court  in  Congress, 
582.  —  Supreme  Court  opinions  concerning  it,  583.  —  Legal  v.  economic 
decisions,  586.  —  Law  points  decided,  586.  —  The  Maximum  (Cincin- 
nati) Freight  Rate  case  revived,  588.  —  Real  conflict  over  economic 
issues,  590.  —  The  Louisville  &  Nashville  case,  590.  —  The  California 
Lemon  case,  592.  —  Broad  v.  narrow  court  review  once  more,  593. 

The  freight  rate  advances  of  1910,  594.  —  Their  causes  examined,  595.  — 
Weakness  of  the  railroad  presentation,  596.  —  Operating  expenses  and 
wages  higher,  597.  —  The  argument  in  rebuttal,  598.  —  "Scientific 
management,"  598.  —  The  Commission  decides  adversely,  599. 


CONTENTS 


CHAPTER  XIX 

THE  LONG  AND  SHORT  HAUL  CLAUSE: 
TRANSCONTINENTAL  RATES 

"Substantially  similar  circumstances  and  conditions"  stricken  out  in 
1910,  601.  —  Debate  and  probable  intention  of  Congress,  602.  —  Con- 
stitutionality of  procedure,  603.  —  Nature  of  applications  for  exemp- 
tion, 604.  —  Market  and  water  competition,  605. 

The  Intermountain  Rate  cases,  610.  —  The  grievances  examined,  611. — 
The  "blanket  rate"  system,  611.  — Its  causes  analyzed,  612. — 
Previous  decisions  compared,  615.  —  Graduated  rates  proposed  by  the 
Commission,  616. — The  Commerce  Court  review,  620.  —  Water  v. 
commercial  competition  again,  620.  —  Absolute  v.  relative  reasonable- 
ness, 622.  —  Legal  technicahties,  625.  —  Minimum  v.  relative  rates, 
624.  —  Constitutionahty  of  minimum  rates,  625. 


CHAPTER  XX 

THE    CONFLICT     OF    FEDERAL    AND    STATE    AUTHORITY; 
OPEN   QUESTIONS 

History  of  state  railroad  commissions,  627.  —  The  legislative  unrest  since 
1900,  628.  —  New  commissions  and  special  laws,  629.  —  The  situation 
critical,  630.  —  Particular  conflicts  illustrated,  631.  —  The  clash  in 
1907,  632.  —  Missouri  experience,  633.  —  The  Minnesota  case,  634. 
—  The  Governors  join  issue,  634.  —  The  Shreveport  case,  635. 

Control  of  coastwise  steamship  Unes,  638.  —  Panama  Canal  legislation, 
641.  —  The  probable  effect  of  the  canal  upon  the  raihoads,  especially 
the  transcontinental  Unes,  643. 


Index 649 


EAILROADS 


CHAPTER  I 

THE   HISTORY   OF   TRANSPORTATION   IN   THE 
UNITED   STATES! 

Significance  of  geographical  factors,  1. — Toll  roads  before  1820,  2. — 
The  "National  pike,"  3.  —  Canals  and  internal  water-ways  before 
1830,  4.  —  The  Erie  Canal,  4.  —  Canals  in  the  West,  6.  —  First 
raihoad  construction  after  1830,  7.  —  Early  development  in  the  South, 
9.  —  Importance  of  small  rivers,  10. 

The  decade  1840-1860,  11.  —  Slow  railway  growth,  mainly  in  the  East, 
12. — Rapid  expansion  1848-1857;  western  river  traffic,  13.  —  Need 
of  north  and  south  railways,  14. — Traffic  still  mainly  local,  15. — 
Effect  of  the  Civil  War,  16.  —  Rise  of  New  York,  17.  —  Primitive 
methods,  17. 

The  decades  1870-1880,  18.  —  Trans-Mississippi  development,  IS.  — 
Pacific  Coast  routes  opened,  19.  —  Development  of  export  trade  in 
grain  and  beef,  20.  —  Trunk  fine  rate  wars,  21.  —  Improvements  in 
operation,  23.  —  End  of  canal  and  river  traffic,  24. 

The  decade  1880-1890,  27.  —  Phenomenal  railway  expansion,  28.  —  Trans- 
continental trade,  28.  —  Speculation  rampant,  29.  —  Gro\\i:h  of  western 
manufactures,  30.  —  Rise  of  the  Gulf  ports,  31. —  Canadian  competi- 
tion, 33.  —  General  resume  and  forecast,  34. 

Public  land  grants,  35.  —  Du-ect  financial  assistance,  37.  —  History  of 
state  aid,  39.  —  Federal  experience  with  transcontinental  roads,  40. 

The  possibility  of  a  unified  nation  of  ninety  odd  million 
souls,  spread  over  a  vast  territory  of  three  million  square  miles, 
—  three-fourths  of  the  area  of  Europe,  —  was  greatly  enhanced 
at  the  outset  by  the  geographical  configuration  of  the  continent 
of  North  America.  It  was  fortunate,  indeed,  that  the  original 
thirteen  colonies  were  strictly  hemmed  in  along  the  Atlantic 
seaboard,  thus  being  protected  against  premature  expansion. 
At  the  same  time  the  north  and  south  direction  of  this  narrow 
coastal  strip,  with  its  variety  of  climates,  soils,  natural  resources 
and  products,  brought  about  a  degree  of  intercourse  and  mutual 
1  For  authorities,  see  note  at  end  of  chapter. 
VOL.1 — 1 


2  RAILROADS 

reliance  of  the  utmost  importance.  The  mere  exchange  of  the 
dried  fish  and  rum  of  New  England,  for  the  sugar,  tobacco, 
molasses  and  rice  of  the  southern  colonies,  paved  the  way  for 
an  acquaintance  and  intellectual  intercourse  necessary  to  the 
development  of  national  spirit.  Throughout  the  colonial 
period,  the  protected  coast  waters  and  navigable  rivers  as  far 
inland  as  the  "fall  line,"  rendered  the  problem  of  long  distance 
transportation  relatively  easy.  For  everything  went  by  water. 
Population  was  compelled  to  develop  the  country  somewhat 
intensively,  by  reason  of  the  difficulty  of  westward  expansion. 
But  this  population  after  the  Revolution  began  to  press  more 
and  more  insistently  against  the  mountain  barriers;  so  that 
the  need  of  purely  artificial  means  of  transportation  at  right 
angles  to  the  seaboard  became  ever  more  apparent. 

The  period  from  the  Revolution  down  to  1829,  when  Stephen- 
son's "Rocket"  made  its  first  successful  run  between  Liverpool 
and  Manchester,  attaining  a  speed  of  twenty-nine  miles  per 
hour,  was  characterized  in  the  United  States  by  increasing 
interest  in  canals  and  toll  roads  as  means  of  communication. 
As  involving  less  expenditure  of  capital,  the  highways  were 
naturally  developed  first.  In  1756  the  first  regular  stage 
between  New  York  and  Philadelphia  covered  the  distance  in 
three  days,  soon  to  be  followed  by  the  "Flying  Machine, " 
which  made  it  in  two-thirds  of  that  time.  Six  days  were  con- 
sumed in  the  stage  trip  from  New  York  to  Boston.  But  by 
1790  a  considerable  network  of  toll  roads  covered  the  northern 
territory,  — systems  which,  as  in  Kentucky  by  1840,  attained 
a  length  of  no  less  than  four  hundred  miles.  Post  roads  linked 
up  such  remote  points  as  St.  Louis,  New  Orleans,  Nashville, 
Charleston,  and  Savannah  by  1830.  Pennsylvania  had  made 
an  early  beginning  in  1806;  and  by  1822  had  subscribed  nearly 
two  million  dollars  to  fifty-six  turnpike  companies  and  wellnigh 
a  fifth  of  that  sum  toward  the  construction  of  highway  bridges. 
Most  of  these  roads  throughout  the  country,  however,  were 
private  enterprises,  and,  even  where  aided  by  the  state  govern- 


HISTORICAL   SURVEY  3 

ments,   were   imperfectly   built   and   worse   maintained,    dis- 
jointed and  roundabout. 

The  need  of  a  comprehensive  highway  system,  especially 
for  the  connection  of  the  coastal  belt  with  the  Middle  West, 
early  engaged  the  attention  of  Congress.  Washington  seems 
to  have  fully  appreciated  its  importance.  Ten  dollars  a  ton 
per  hundred  miles  for  cost  of  haulage  by  road,  necessarily 
imposed  a  severe  restriction  upon  the  extension  of  markets. 
The  Federal  Congress  in  1802  appropriated  one-twentieth  of 
the  proceeds  from  the  sale  of  Ohio  lands  to  the  construction  of 
such  highways.  Gallatin's  interest  in  the  matter  five  years 
later,  led  to  his  proposal  of  an  expenditure  of  $20,000,000  for 
the  purpose.  The  Cumberland  Road  or  "National  Pike"  was 
the  result.  This  great  highway  started  from  near  the  then 
centre  of  population  in  jMaryland  and  cut  across  the  Middle 
West,  halfway  between  the  lakes  and  the  Ohio  river.  From 
the  upper  reaches  of  the  Potomac  it  followed  Braddock's  Old 
Road  to  Uniontown,  Pennsylvania,  then  by  Wheeling  over 
"Zanes  trace"  to  Zanesville,  Ohio.  From  that  point  on  it 
trended  toward  St.  Louis  by  way  of  Columbus  and  Indian- 
apolis, ending  at  Vandalia,  IlUnois.  During  the  space  of  thirty 
years  about  $10,000,000  was  expended  upon  it,  and  it  undoubt- 
edly did  much  to  promote  the  settlement  of  the  country.  But 
the  success  of  canals  and  railroads  in  the  meantime  sapped  the 
vitality  of  the  movement  for  further  turnpike  construction 
before  St.  Louis  was  reached.  By  the  close  of  the  war  of  1812, 
in  fact,  it  had  become  apparent  that  highways  were  destined 
to  serve  only  as  feeders  after  all;  and  not  as  main  stems  of 
communication. 

Improved  riverv/ays  and  canals  constituted  the  next  advance 
in  transportation  method.  So  far  as  the  latter  were  concerned, 
although  the  initial  expense  was  great,  the  subsequent  cost  of 
movement  as  compared  with  turnpikes  was,  of  course,  low. 
Especially  was  this  cheapness  of  movement  notable  in  river 
trajffic.     Whereas  it  was  said  to  cost  one-third  of  the  worth  of 


4  RAILROADS 

goods  to  transport  them  by  land  from  Philadelphia  to  Kentucky, 
the  cost  of  carriage  from  Illinois  down  to  New  Orleans  by  water 
was  reputed  to  equal  less  than  five  per  cent,  of  their  value. 
Hence  the  steamboat,  invented  in  1807  and  introduced  on  the 
Ohio  river  in  1811,  opened  up  vast  possibilities  for  enlarged 
markets.  But  it  was  not  until  the  generation  of  sufficient 
power  to  stem  the  rapid  river  currents  about  1817  that  our 
internal  water-ways  became  fully  utilized.^  From  that  period 
dates  the  rapid  growth  of  Pittsburg,  Cincinnati,  and  St.  Louis. 
The  real  interest  of  the  East  in  western  trade  dates  from  the 
close  of  the  war  of  1812.  Even  then,  however,  the  natural 
outlet  for  the  products  of  the  strip  of  newlj^  settled  territory 
west  of  the  AUeghanies,  was  still  over  the  mountains  to  the 
Atlantic  seaboard.  Cotton  culture  in  the  South  had  not  yet 
given  rise  to  a  large  demand  for  food  stuffs  in  the  lower  Missis- 
sippi valley.  It  was  a  long  and  wellnigh  impossible  way  around 
by  the  Gulf  of  Mexico.  Consequently  the  main  attention  of 
the  people  during  the  canal  period  between  1816  and  1840  was 
focussed  upon  direct  means  of  communication  between  the 
coastal  plain  and  the  interior.  A  few  minor  artificial  water- 
ways, Uke  the  Middlesex  canal  from  Boston  to  Lowell,  com- 
pleted about  1810,  proved  their  entire  feasibility  from  the  point 
of  view  both  of  construction  and  profit.  Even  earlier  than 
this  the  Dismal  Swamp  canal  and  one  along  the  James  river  in 
Virginia  had  been  projected  and  in  part  built.  But  the  era  of 
canal  construction  as  such  on  a  large  scale  cannot  be  said  to 
begin  until  after  the  close  of  the  war  of  1812.  The  most  im- 
portant enterprise,  of  course,  was  the  building  of  the  Erie 
Canal  to  unite  the  headwaters  of  the  Hudson  river  with  the 
Great  Lakes  at  Buffalo.  This  waterway,  began  in  1817,  was 
completed  in  eight  years  and  effected  a  revolution  in  internal 
trade.  It  was  not  only  successful  financially,  repaying  the 
entire  construction  in  ten  years,  but  it  at  once  rendered  New 

'  F.  H.  Dixon,  Traffic  History  of  the  Mississippi  river,  prepared  for  the 
National  Waterways  Commission,  1909,  is  best  on  this. 


HISTORICAL   SURVEY  6 

York  the  dominant  seaport  on  the  Atlantic.  Philadelphia  was 
at  once  relegated  to  second  place.  Agricultural  products, 
formerly  floated  down  the  Susquehanna  to  Baltimore,  now 
went  directly  over  the  Hudson  river  route.  Branch  canals 
all  over  New  York  state  served  as  feeders;  and  flourishing 
towns  sprang  up  along  the  way,  especially  at  junction  points. 
The  cost  of  transportation  per  ton  from  Buffalo  to  New  York, 
formerly  SlOO,  promptly  dropped  to  less  than  one-fourth  that 
sum.  By  wagon  it  was  said  to  cost  S32  per  hundred  miles  for 
transport,  whereas  charges  by  canal  fell  to  one  dollar.  Little 
wonder  that  the  volume  of  trafiic  immensely  increased,  and 
that,  moreover,  the  balance  of  power  among  western  centres 
was  at  once  affected.  The  future  of  Chicago,  as  against  St. 
Louis,  was  insured;  and  the  long  needed  outlet  to  the  sea  was 
pro\'ided  for  the  agricultural  products  of  the  prairie  West. 

The  instant  and  phenomenal  success  of  the  Erie  Canal 
immediately  encouraged  the  prosecution  of  similar  enterprises 
elsewhere.  Philadelphia  pushed  the  construction  of  a  compli- 
cated chain  of  horse  railroads,  canals  and  portages  in  order  to 
reach  the  Ohio  at  Pittsburg.  In  1834  an  entire  boat  and  cargo 
made  the  transit  successfully.  The  cost  of  this  enterprise 
exceeded  $10,000,000;  but  it  was  expected  to  provide  a  suc- 
cessful competitor  for  the  Erie  Canal.  The  latter  in  the 
meantime  had  been  linked  up  with  the  Ohio  river  by  canals 
from  Cleveland  to  Portsmouth,  from  Toledo  to  Cincinnati, 
and  from  Beaver  on  the  Ohio,  to  Erie  on  the  Lake.  By  the 
first  of  these  routes  in  1835,  no  less  than  86,000  barrels  of  flour, 
28,000  bushels  of  wheat  and  2,500,000  staves  were  carried  by 
canal  on  to  New  York.  Boston  and  Baltimore  were  prevented 
from  engaging  in  similar  canal  enterprises  only  by  the  advent 
of  the  railway.  Meantime  the  Chesapeake  and  Ohio  Canal 
was  started  in  1828  as  a  joint  undertaking  of  Maryland,  Vir- 
ginia, and  the  Federal  government,  to  connect  the  Potomac 
with  the  Ohio.  It  was  not  completed  in  fact  until  1850,  long 
after  its  potential  usefulness  had  ceased.     Besides  these  through 


6  RAILROADS 

routes,  canals  for  the  accommodation  of  local  needs  were  rapidly 
built  in  the  East.  Boston  was  connected  with  Lowell;  Wor- 
cester with  Providence;  New  Haven  with  the  Connecticut 
river.  In  Pennsylvania,  especially,  the  anthracite  coal  indus- 
try, developing  after  1815,  encouraged  the  building  of  artificial 
waterways.  The  Delaware  and  Hudson,  the  Schuylkill, 
Morris  and  Lehigh  canals  were  built  between  1818  and  1825 
along  the  natural  waterways  leading  out  from  the  hard  coal 
fields.  New  Jersey  connected  New  York  and  Philadelphia  by 
the  Raritan  Canal  in  1834-1838  at  a  cost  of  nearly  $5,000,000; 
and  another  canal  to  connect  Delaware  and  Chesapeake  bays 
was  with  difficulty,  and  only  by  the  aid  of  the  Federal  govern- 
ment, finally  completed  about  1825  at  a  cost  of  nearly  $4,000- 
000.  Further  south,  many  small  canals  and  river  improvements 
were  made.  The  Dismal  Swamp  enterprise  had  already  con- 
nected Chesapeake  Bay  and  the  coast  waters  and  sounds  of 
the  Carolinas;  but  provision  for  slack  water  navigation  of  the 
Tennessee  river  at  Mussel  Shoals  in  Alabama,  and  of  the 
various  branches  of  the  Ohio  river  in  Kentucky  was  not  made 
until  the  middle  of  the  thirties. 

The  open  prairies  of  the  West  offered  the  most  inviting 
prospects  for  canal  construction,  both  because  of  the  dearth 
of  roads  and  the  ease  of  construction  of  artificial  waterways. 
Not  only  through  routes  to  the  East,  as  already  described,  but 
local  enterprises  of  various  sorts  abounded  on  every  side. 
Chicago  was  connected  with  the  Mississippi  system  by  way  of 
the  Illinois  and  Michigan  Canal;  a  route  across  the  lower 
peninsula  of  Michigan,  and  many  feeders  in  Indiana  and  Ohio 
were  built.  The  demands  upon  the  capital  of  the  country  for 
these  purposes  during  the  twenty  years  after  1815  were  enor- 
mous; and  it  was  only  by  resort  to  state  subventions  and 
grants  from  the  Federal  government  out  of  the  proceeds  of 
sales  of  public  lands,  that  so  much  was  actually  accomplished. 
State  debts  aggregating  no  less  than  $60,000,000  for  canal 
construction  were  incurred  prior  to  1837.     Much  of  this  in- 


HISTORICAL    SURVEY  7 

vestment  proved  ultimately  unproductive;  extravagance  and 
fraud  were  rife.  But  the  economic  results  were  immediately 
apparent  and  highly  satisfactory,  as  witnessed  in  the  higher 
prices  obtainable  for  all  the  products  of  the  interior  for,  trans- 
portation to  the  seaboard.  Flour,  which  could  be  had  at  three 
dollars  a  barrel  at  Cincinnati  in  1826,  rose  to  double  that 
figure  by  1835;  and  corn  rose  from  twelve  to  thirty-two  cents 
a  bushel.  The  panic  of  1837  and  the  subsequent  depression, 
of  course,  put  a  severe  check  upon  further  canal  building.  But 
an  even  more  potent  force  was  the  proved  success  of  the  newly 
invented  mode  of  carriage  by  railroad.  Before  1840  the  era 
of  canal  construction  was  definitely  at  an  end.  Almost  the 
only  exception  was  the  Erie  Canal,  which  continued  to  prosper 
by  reason  of  its  strategic  location.  Rates  were  reduced  in  1834; 
and  two  years  later  the  canal  was  widened  and  deepened  to 
accommodate  the  ever  increasing  traffic.  Surplus  revenues' 
enabled  the  amortization  of  its  debt;  and  by  1852  the  revenue 
exceeded  three  million  dollars  annually.  Although  the  pressure 
of  railway  competition  was  increasingly  felt;  as  late  as  1868, 
practically  all  the  grain  into  New  York  was  brought  by  canal 
barge.  The  movement  of  this  canal  tonnage,  year  by  year, 
is  sho^vTi  by  the  diagram  on  page  25.  As  will  be  seen,  it  was 
not  until  the  trunk  line  rate  wars  of  1874-1877  that  the  in- 
feriority of  the  canal  to  the  railroad,  even  in  this  favored  in- 
stance, was  finally  demonstrated.  The  revival  of  interest  in 
the  Erie  Canal  which  has  occurred  in  recent  years,  leading  to 
the  exjDenditure  of  millions  of  dollars  by  the  state  of  New  York 
in  still  further  enlarging  it,  is  due  to  an  effort  to  insure  the 
supremacy  of  the  port  of  New  York  in  export  trade  against  the 
growing  competition  of  the  Gulf  ports,  which  it  originally 
gained  when  the  canal  was  constructed. 

The  first  serious  attempt  at  railroad  operation  in  the  United 
States  was  on  the  Baltimore  &  Ohio  line  in  1830.  The  company, 
although  chartered  in  1821,  did  not  begin  construction  for 
seven  years.     It  was  three  years  later  than  this  when  Peter 


8  RAILROADS 

Cooper's  "Tom  Thumb"  made  a  trial  run  out  from  Balti- 
more with  a  record  of  thirteen  miles  per  hour.  A  road  from 
Albany  to  Schenectady  was  opened  in  1831;  and  a  series  of 
connecting  links  was  rapidly  pushed  westward  across  New  York 
state,  finally  reaching  Buffalo  in  1842.  But  prior  to  1840, 
activity  in  railroad  construction  was  most  noticeable  in  Penn- 
sylvania: partly  because  of  its  lack  of  so  admirable  a  water 
route  to  connect  it  with  inland  markets  as  was  enjoyed  by  New 
York,  and  partly  because  of  the  growth  of  the  coal  business 
which  caused  the  main  lines  of  the  Reading  Railroad  to  be  laid 
down  as  early  as  1838.  The  state  of  Pennsylvania  was  busily 
engaged  in  improving  her  existing  route  over  the  mountains 
by  replacing  the  canal  and  portage  portions  with  rail  lines. 
Pittsburg,  which  formerly  had  been  five  and  a  half  days  dis- 
tant, was  thus  connected  by  railroad  in  1834.  Cars  built 
"in  the  form  of  boat  sections  were  to  be  transferred  from  the 
rails  to  canals  along  part  of  this  route.  The  Pennsylvania 
Railroad  aiming  to  provide  continuous  railway  communication 
over  the  mountains,  was  not  chartered  until  1846;  but,  never- 
theless, as  early  as  1835  Pennsylvania  had  over  two  hundred 
miles  of  railway,  about  one-quarter  of  the  mileage  of  the  United 
States.  New  York  and  New  Jersey  had  about  one  hundred 
miles  between  them,  while  South  Carolina  had  one  hundred 
and  thirty-seven  miles.  The  Baltimore  &  Ohio  during  this 
time  was  being  slowly  pushed  westward;  although  it  did  not 
reach  the  Ohio  river  until  1853,  two  years  after  the  Erie  had, 
by  liberal  state  aid,  been  carried  to  the  lakes  at  Dunkirk,  N.Y. 
Thus  it  appears  that  during  the  decade  to  1840  railroad  build- 
ing had  progressed  unchecked  by  the  panic  of  1837.  This 
panic,  in  fact,  by  rendering  the  state  construction  of  canals 
impossible,  may  actually  have  increased  the  interest  in  railroad 
building.  The  railways  of  this  time  were  still  mainly  experi- 
mental. They  were  local  and  disconnected,  serving  rather  as 
supplementary  to,  than  as  actual  competitors  of  the  existing 
water  routes.     In  Massachusetts  and   Connecticut  the  lines 


HISTORICAL   SURVEY  9 

radiating  out  from  seaports  were  intended  to  serve  only  as 
feeders  to  coastwise  traffic;  just  as  short  lines  were  built  along 
the  Great  Lakes  during  the  decade  to  1850  to  bring  products  out 
to  a  connection  with  the  natural  water  routes.  A  notable 
exception  was  the  continuous  line  which  by  1840  was  in  opera- 
tion lengthwise  of  the  Atlantic  coast  plain  from  New  York 
south  to  Wilmington,  North  Carolina.  The  Camden  and 
Amboy  between  Philadelphia  and  New  York  was  operated 
early  in  the  thirties;  about  the  same  time  that  the  Phila- 
delphia, Wilmington  &  Baltimore  was  completed.  Much  in- 
teresting history  centres  about  the  first  named  road.  It  seems 
to  have  been  a  notoriously  corrupting  influence  in  New  Jersey 
politics  from  the  outset.  Public  opinion  became  so  roused  over 
its  exactions,  that  a  memorial  from  the  merchants  of  New  York 
to  the  Thirtieth  Congress  resulted.  The  enterprise  was  the  most 
profitable  of  all  the  earlier  companies,  its  net  earnings  in  1840 
amounting  to  $427,000.  In  1855  it  paid  a  twelve  per  cent, 
dividend.  From  Washington  south  by  way  of  Fredericksburg 
and  Richmond,  the  southern  states  could  be  reached  without 
undertaking  the  perilous  passage  round  Cape  Hatteras.  By 
1840  the  only  portions  of  the  original  colonies  still  isolated 
were  New  England,  at  one  end,  which  was  still  obliged  to  de- 
pend upon  Long  Island  transit  to  New  York  by  boat;  and 
in  the  Far  South,  the  back  country  behind  Charleston  and 
Savannah. 

Several  important  economic  causes  conspired  to  stimulate 
railroad  construction  at  a  very  early  time  in  the  southern  states.^ 
They  welcomed  the  new  means  of  transportation  even  more 
eagerly  than  the  wealthier,  commercial  and  more  densely 
populated  North.  Ever  since  the  invention  of  the  gin  in  1793, 
the  production  of  cotton  had  grown  apace.  Profits  were  so 
high  that  all  interest  in  other  forms  of  agriculture  waned. 
Cotton  production  until  about  1817  was  mainly  confined  to 

^  U.  B.  Phillips,  A  History  of  Transportation  in  the  Eastern  Cotton 
Belt  to  1S60,  1908,  is  a  standard  authority  in  this  field. 


10  RAILROADS 

the  long  narrow  strip  of  Piedmont  territory,  Ijdng  between  the 
sandy  "pine  barrens"  along  the  coast  and  the  mountains  in 
the  rear.  This  fertile  strip  —  the  seat  of  the  plantation  sys- 
tem —  thus  geographically  isolated,  had  only  one  means  of 
communication  with  the  outer  world,  namely  the  coast  rivers 
debouching  upon  the  sea  at  Charleston,  Savannah,  or,  later  on, 
upon  the  Gulf  at  Mobile.  But  these  seaports  were  not  con- 
veniently situated  to  serve  as  local  trade  centres.  They  were 
separated  from  the  cotton  belt  by  the  intervening  pine  barrens. 
The  local  business  of  buying  the  cotton  from  the  planters,  and  in 
return  supplying  their  imperative  needs  for  supplies  of  all 
sorts,  including  even  food-stuffs  which  they  neglected  to  raise, 
was  concentrated  in  a  series  of  towns  located  at  the  so-called 
"fall  line"  of  the  rivers.  From  Alexandria  and  Richmond  on 
the  Potomac  and  James,  round  by  Augusta,  Macon,  and 
Columbia  to  Montgomery,  Alabama,  such  local  centres  of 
importance  arose,  each  one  just  at  the  head  of  navigation. 
For  some  years  profits  were  so  large  that  heavy  charges  for 
transportation  to  the  sea  were  patiently  borne.  But  after  the 
opening  of  the  western  cotton  belt  along  the  Mississippi  bottom 
lands  after  1817,  the  price  of  cotton  experienced  a  severe 
decline,  greatly  to  the  distress  of  the  older  planters.  For  this 
reason  an  insistent  demand  for  improved  means  of  transporta- 
tion had  already  brought  about  great  interest  in  turnpike  and 
canal  building.  South  Carolina  at  a  very  early  date  had  ex- 
pended about  two  million  dollars  for  these  purposes.  Steam- 
boats on  the  smaller  rivers  were  also  used.  Immediately  upon 
the  successful  demonstration  of  traction  by  steam  the  aid  of 
the  states,  cities  and  individuals  was  invoked;  so  that  a  well 
planned  system  of  railroads  resulted  even  as  early  as  1843. 
The  South  Carolina  Railroad  between  1829  and  1833  most 
successfully  operated  a  pioneer  line,  its  securities  being  quoted 
at  twenty-five  per  cent,  above  par.  The  Charleston  &  Ham- 
burg line  opened  in  1833,  one  hundred  and  thirty-seven  miles 
long,  was  said  to  be  the  largest  system  under  one  management 


HISTORICAL   SURVEY  11 

in  the  world.  Augusta  &  Columbia  were  linked  up  with  the 
coast.  Savannah  also  penetrated  inland  to  the  Piedmont  belt 
by  a  line  finished  in  1843  as  far  as  Macon.  The  interest  in  a 
through  route  to  connect  Cincinnati  and  Louisville  \vith  Charles- 
ton was  very  keen;  and  had  it  not  been  for  the  tremendous  fall 
in  cotton  prices  in  1839-1840,  the  project  might  have  succeeded. 
As  it  was,  a  great  railroad  convention  at  Knoxville  in  1836 
was  attended  by  no  less  than  four  hundred  delegates  from  nine 
different  states.  It  was  not  so  much  the  mileage  of  these  roads 
which  rendered  them  notable,  as  the  fact  of  their  intended 
rehance  upon  through  freight  instead  of  passenger  business. 
Roads  in  other  parts  of  the  country  were  as  yet  depending  in 
the  main  upon  passenger  trafl&c  or  upon  the  carriage  of  what 
we  would  now  call  local  or  parcel  freight.  These  southern 
lines  were  built  to  accommodate  traffic  in  great  staple  agri- 
cultural products  —  cotton  out  and  food-stuffs  in.  Unlike 
the  northern  roads,  also,  they  early  adopted  a  uniform  gauge 
and  sought  to  promote  long  distance  business.  Later  develop- 
ments in  the  South  especially  in  the  direction  of  improved 
service  were  very  slow.  The  northern  states  speedily  out- 
stripped them;  but  the  enterprise  of  this  region  in  railroad 
building  and  operation  at  the  outset  has  not  been  fully 
appreciated. 

The  decade  1840-1850  was  marked  by  slow  growth  of  the 
railway  net,  —  everywhere  except  in  New  England,  where 
the  main  lines  were  being  rapidly  laid  down.  The  doom  of  the 
canal  as  a  competitor  had  been  sealed,  to  be  sure;  but  the 
dearth  of  private  capital,  except  in  New  England,  rendered 
progress  slow  until  aid  from  the  government  was  invoked. 
Until  this  time  private  enterprise  had  been  the  main  reliance. 
Several  important  undertakings  were  now  launched.  The 
Pennsylvania  Railroad  was  chartered  in  1846,  but  was  not 
completed  to  Pittsburg  till  1852.  The  Boston  &  Albany  line 
was  built;  and  Buffalo  had  been  reached.  But  neither  the 
Baltimore  &  Ohio,  nor  the  Erie  had  yet  been  pushed  to  com- 


12  RAILROADS 

pletion.  The  possibilities  of  the  great  Northwest  had  not 
dawned  upon  the  people.  At  the  opening  of  the  decade,  St, 
Louis  was  still  almost  three  times  as  large  as  Chicago.  Cin- 
cinnati was  the  most  important  western  centre,  its  prestige 
being  enhanced  by  the  first  all-rail  line  to  the  Great  Lakes  at 
Sandusky,  opened  in  1848.  The  relative  importance  of  these 
inland  centres  is  indicated  by  their  populations.  In  1850  these 
were  as  follows:  Cincinnati,  115,000;  Chicago,  30,000;  St. 
Louis,  78,000;  and  Louisville,  43,000.  Cincinnati  retained 
its  preeminence  until  after  the  Civil  War;  but  by  1880  had 
dropped  to  a  low  third  in  rank,  only  half  the  size  of  Chicago 
and  two-thirds  the  size  of  St.  Louis. ^  During  the  decade  to 
1850,  the  Ann  Arbor  line  from  Detroit  also  was  pushed  on  to 
Chicago  in  1852,  to  cut  off  the  roundabout  trip  by  lake;  ^  but 
St.  Louis  was  still  isolated;  Indianapolis  was  barely  connected 
with  the  Ohio  river.  The  river  trade  thus  still  dominated 
the  western  situation.  In  the  South  one  important  enterprise 
monopolized  all  attention,  namely  the  construction  by  the 
state  of  Georgia  of  the  Western  &  Atlantic  road  over  the 
mountains  from  Atlanta  to  Chattanooga  on  the  Tennessee 
river.^  Atlanta  was  to  become  the  western  terminus  of  the 
coast  roads,  built,  as  has  been  said,  to  provide  an  outlet  to  the 
sea  for  the  Piedmont  cotton  belt.  This  new  enterprise  was  to 
open  up  a  direct  route,  not  alone  to  the  new  western  South  but 
to  the  entire  Northwest  by  connecting  with  a  navigable 
branch  of  the  Ohio.  It  is  an  odd  fact  that  at  this  time  the 
southern  ports  were  nearer  the  West  than  the  cities  of  the 
North  Atlantic.  Part  of  the  first  rush  of  the  Forty-niners  to 
California  was  by  way  of  Charleston  and  thence  west  over  the 
Charleston  &  Hamburg  line.  From  1837  on,  the  Western  & 
Atlantic  line  was  under  construction.  In  the  meantime  Atlanta 
had  been  reached  from  the  east;  so  that  at  the  beginning  of  the 

*  U.  S.  Report  on  Internal  Commerce,  1880,  p.  72  et  seq. 
^  H.   G.   Pearson,   An  American  Railroad   Builder,   John   M.   Forbes, 
1911,  for  this  field.  ^  Yale  Review,  1906,  pp.  259-282. 


HISTORICAL   SURVEY  13 

next  decade,  two  at  least  of  the  main  arteries  of  the  southern 
net  were  ready  for  business. 

The  total  mileage  of  the  United  States  expanded  in  ten 
years  after  1840  from  2,800  to  upwards  of  9,000  miles  of  line. 
For  some  time  not  over  four  or  five  hundred  miles  annually 
had  been  constructed;  but  suddenly  the  new  mileage  laid 
dowTi  in  1848  jumped  to  more  than  fourteen  hundred  miles. 
This  was  a  presage  of  the  great  expansion  to  occur  in  the  next 
few  years,  —  an  expansion  made  possible  partly  as  a  result  of 
important  mechanical  improvements  and  inventions.  Notable 
among  these  was  the  substitution  of  the  solid  iron  rail  for  the 
primitive  method  of  plating  beams  with  thin  strips  of  iron. 
The  manufacture  of  rails  in  the  United  States,  begun  in  1844, 
did  much  to  stimulate  the  subsequent  growi;h.  The  repeal 
of  the  law  of  1832  permitting  free  entry  of  railway  iron  which 
took  place  in  1843,  marks  the  beginning  of  a  new  era.  During 
these  eleven  years  almost  five  million  dollars  in  duties  on  rails 
was  refunded. 

The  utmost  activity  in  railroad  building  obtained  from 
1848  until  the  panic  of  1857,  interrupted  only  by  a  minor 
disturbance  in  1854.  The  total  mileage  expanded  more  than 
threefold,  attaining  a  total  of  30,000  miles  by  1860.  A  veri- 
table construction  mania  prevailed  in  the  states  of  Ohio, 
Indiana,  and  Illinois.  Not  very  much,  relatively,  was  accom- 
plished in  New  York  and  Pennsylvania,  and  very  little  in  New 
England,  which  was  already  well  served.  A  dominant  influence 
in  promoting  the  new  construction  at  this  time  was  the  im- 
perative need  of  the  South  for  food-stufTs.  Cotton  culture  was 
in  full  swing  in  the  lowlands  of  Alabama,  Mississippi  and 
Louisiana.  An  enormous  steam  and  flat  boat  tormage  on  the 
Ohio  and  Mississippi  rivers  had  grown  up  to  care  for  this  trade.  ^ 
By  1845  the  river  shipping  amounted  to  nearly  two  million 
tons.  Fifteen  hundred  out  of  four  thousand  steamboat 
arrivals  at  New  Orleans  in  1859,  came  from  the  Ohio  river  and 
1  Dixon,  op.  cit. 


14  RAILROADS 

the  upper  Mississippi.  The  vessels  had  also  greatly  increased 
in  size.  The  flat  boats  which  in  1820  carried  only  thirty  tons 
of  freight,  were  enlarged  tenfold  in  tonnage  and  threefold  in 
length  by  1855,  and  in  that  year  first  began  to  be  towed  back 
up  the  river.  A  rapid  increase  in  coal  shipments  down  stream 
from  Pittsburg  also  took  place  during  the  forties.  From  737,000 
bushels  in  1844,  to  22,000,000  bushels  in  1855  and  37,900,000 
in  1860,  represents  an  enormous  development  of  internal 
commerce.  The  lead  mines  of  Missouri  shipping  through  St. 
Louis  had  become  important  after  1832  and  quadrupled  in 
volume  by  1848,  attaining  a  total  of  42,400,000  pigs  of  sixty 
pounds  each.  This  traffic  steadily  dwindled,  however,  falling 
away  by  one  half  within  the  next  ten  years.  Memphis  was 
rapidly  growing,  outstripping  the  city  of  Natchez  which  had 
formerly  played  a  more  important  part  in  the  southern  trade. 
But  the  most  important  element  in  this  Mississippi  river  busi- 
ness was  the  shipment  down  stream  of  food  stuffs.  Produce 
received  at  New  Orleans  was  valued  at  $26,000,000  in  1830, 
$50,000,000  in  1841,  and  $185,000,000  in  1860.  About  thirty 
per  cent,  of  this  consisted  of  farm  produce  from  the  Northwest, 
together  with  horses,  mules,  implements,  and  clothing.  The 
need  of  ampler  transportation  facilities  to  accommodate  all 
this  business  was  apparent.  A  response  came  in  plans  for  new 
north  and  south  lines  of  railway.  The  difficulty  of  financing 
these  enterprises  was  solved  in  part  by  the  expedient  of  land 
grants  by  the  different  states.  These  amounted  to  no  less 
than  eight  million  acres  under  President  Fillmore,  attaining  a 
total  of  nineteen  million  acres  under  the  Pierce  administration. 
By  1861  these  grants,  mainly  in  aid  of  railroads,  had  reached 
a  total  of  no  less  than  31,600,842  acres,  —  more  than  equal  to 
the  area  of  either  of  the  states  of  Ohio,  or  New  York.i  The 
Illinois  Central  grant  in  1851  was  the  largest  among  these. 
Congress  in  1850  had  made  over  a  tract  of  2,700,000  acres  to 
the  state  of  Illinois  to  be  used  for  this  purpose.  This  gift  was 
1  C/.,  p.  36,  wi/ra. 


HISTORICAL   SURVEY  15 

soon  followed  elsewhere  by  grants  to  aid  the  building  of  the 
Mobile  &  Ohio  and  the  Mississippi  Central,  together  with 
smaller  roads  in  Alabama  and  Florida.  The  Gulf  of  Mexico 
was  thus  reached  by  through  lines  from  the  west  in  1858-1861. 
In  other  parts  of  the  country  railroads  were  pushed  well  out  in 
advance  of  population.  The  Mississippi  was  reached  by  the 
Rock  Island  system  in  1854,  quickly  followed  by  the  Alton, 
the  Burlington  and  the  predecessor  of  the  present  Northwest- 
ern system.  The  Hannibal  &  St.  Joseph  was  the  first  to  reach 
the  Missouri  river  in  1858.  There  is  no  doubt  that  the  dis- 
covery of  gold  in  California  greatly  stimulated  interest  in  all 
these  far  western  enterprises. 

Despite  this  remarkable  record  of  gro^vth,  a  corresponding 
development  of  long-distance  communication  between  different 
parts  of  the  country  had  not  yet  taken  place.  While  the  all- 
rail  routes  were  open,  they  still  consisted  in  large  part  of  dis- 
connected local  lines.  The  New  York  Central  with  difficulty 
in  1853,  and  in  spite  of  intense  local  opposition,  succeeded  in 
effecting  a  consolidation  of  what  were  originally  eleven  separate 
lines;  but  the  union  with  the  Hudson  River  Railroad  was  not 
to  follow  until  1869.  The  Boston  &  Albany  was  still  a  local 
enterprise,  although  built  with  larger  ends  in  view.  At  this 
time  the  possibility  of  long-distance  carriage  of  grain  was  only 
very  dimly  appreciated.  Fast  freight  lines  to  operate  without 
breaking  bulk  over  independent  roads,  constituted  the  first 
step  in  this  direction.  Such  companies  on  the  New  York 
Central  in  1855  and  on  the  Erie  two  years  later,  were  operating 
in  the  eastern  trunk  territory.  The  so-called  Green  lines  were 
engaging  in  long  distance  business  by  way  of  Ohio  river  con- 
nections between  the  territory  to  the  northwest  and  the  great 
grain  and  pork  consuming  cotton  belt.  But  railroad  traffic 
as  a  whole  was  still  relatively  unimportant  as  compared  wath 
water  carriage.  The  culmination  of  steadily  increasing  receipts 
on  the  Erie  Canal  did  not  occur  until  1856.  River  tonnage 
went  on  steadily  increasing  for  another  twenty  years.     The 


16  RAILROADS 

years  just  before  the  war  seem  to  have  marked  the  turning 
point  in  respect  of  canal  competition;  but  the  total  volume  of 
railroad  shipments,  nevertheless,  still  appears  insignificant  by 
comparison  with  the  present  day.  The  total  traffic  in  1859 
on  the  Pennsylvania  Railroad  was  only  353,000  tons  east  bound 
and  190,700  tons  west  bound;  while  on  the  New  York  Central 
it  was  570,900  and  263,400  tons,  respectively.  The  important 
point  was  that  the  cost  of  shipment  was  steadily  declining. 
According  to  H.  C.  Carey,  the  passenger  rate  from  Chicago  to 
New  York  had  fallen  from  about  seventy-five  dollars  to  seveji- 
teen  dollars  in  1850;  while  the  freight  rate  per  bushel  on  wheat 
had  fallen  to  twenty-seven  cents;  and  per  barrel  of  flour  to 
eighty  cents.  Nothing  but  the  development  of  a  large  surplus 
production  in  the  West  was  needed  to  create  a  great  traffic; 
and  this  was  dependent  upon  the  spread  of  population  and 
improvements  in  agricultural  production  which  had  not  yet 
occurred.  Transportation  as  yet  waited  upon  the  progress  of 
invention;  not  in  instruments  of  transportation  alone,  but  in 
all  the  other  fields  of  industrial  endeavor. 

The  panic  of  1857  and  the  increasing  bitterness  of  the 
slavery  question,  followed  by  the  outbreak  of  the  Civil  War, 
quite  diverted  the  attention  of  the  country  from  internal 
development.  Railroad  construction  had  already  declined 
from  3,600  miles  in  1856  to  1,837  miles  in  1860.  It  fell  to 
less  than  700  miles  in  1861.  Brisk  recovery  set  in  after 
1865;  but  it  was  not  until  1868  that  any  rapid  growth  again 
ensued,  or  even  a  resumption  of  the  activity  of  the  preceding 
decade.  All  of  the  southern  lines  were  prostrated;  the  north 
and  south  roads,  like  the  Illinois  Central  system,  stood  still. 
The  western  railway  net  alone  was  slowly  expanding.  The 
Burlington  grew  from  168  miles  in  1861  to  over  400  miles  in  1865; 
and  the  Chicago  &  Northwestern  then  succeeded  in  bridg- 
ing the  Mississippi.  The  Erie  was  still  a  more  important  route 
by  fifty  per  cent.,  measured  by  ton  mileage,  than  the  New  York 
Central;  although  its  evil  days,  under  the  control  of  Jim  Fiske 


HISTORICAL   SURVEY  17 

and  Jay  Gould  in  1866-1869,  were  about  to  begin.  The  Mecca 
of  trade  from  the  Atlantic  ports  was  still  St.  Louis,  although 
Chicago  outgrew  it  during  the  decade.  The  predominant 
direction  of  trade  is  shown  by  the  widespread  public  interest  in 
New  York  in  the  newly  opened  Western  &  Atlantic  railroad, 
which  by  a  spur  from  the  Erie  road  at  Salamanca,  was  to 
shorten  the  time  of  shipment  of  goods  from  New  York  to  Cin- 
cinnati from  one  month  to  a  week.  The  commercial  star  of 
New  York  was  steadily  rising.  A  great  aid  thereto  was,  of 
course,  the  progress  of  consolidation  among  the  connecting 
links  to  Chicago.  Vanderbilt  and  Scott  were  busily  engaged 
in  this  constructive  work.  The  former  had  shifted  his  interest 
from  steamboats  to  railroads,  and  became  dominant  in  the 
Harlem  and  Hudson  River  roads  in  1863-1864.  Three  years 
later  he  secured  control  of  the  New  York  Central  from  Albany 
west,  and  consolidated  it  with  the  Hudson  River  line.  These 
trunk  line  roads,  the  Pennsylvania  and  the  New  York  Central, 
both  finally  secured  connections  with  Chicago  in  1869.  A 
channel  for  new  through  currents  of  trade  merely  awaited  the 
growth  of  business. 

It  is  important  to  realize  the  relative  primitiveness  of 
transportation  at  the  close  of  the  Civil  War.^  The  Bessemer 
steel  process  was  not  perfected  until  the  latter  half  of  the  decade.^ 
Iron  rails  still  rendered  light  rolling  stock  necessary.  But  after 
1868  the  price  of  steel  rails  rapidly  declined,  from  about  $166 
(currency)  per  ton  in  1867  to  $112  in  1872,  and  to  $59  in  1876.2 
This  doubtless  gave  a  tremendous  impetus  to  the  developments 
of  later  years,  although  its  effects  were  not  evident  for  some 
time.  One  of  the  most  troublesome  features  of  the  time  were 
the  differences  of  gauge  which  rendered  through  traffic  difficult. 
In  New  York  and  New  England,  the  standard  gauge  was  four 
feet  eight  and  one-half  inches.    West  and  south  of  Philadelphia 

^  E.  D.  Fite,  Social  and  Industrial  Conditions  at  the  North  during  the 
Civil  War,  1910,  pp.  42-77. 

2  Railway  Age  Gazette,  1912,  p.  125,  reprints  statistics  since  1840  of 
all  sorts  concerning  rails. 

VOL.  1—2 


18  RAILROADS 

it  was  four  feet  ten  inches.  In  the  Far  South  it  was  J5ve  feet; 
and  in  Canada  and  Maine,  either  five  feet  six  inches  or  six  feet. 
Between  Chicago  and  Buffalo  five  different  roads  still  had  no 
common  gauge.  Clumsy  expedients  of  shifting  car  trucks, 
three  rails  or  extra  wide  wheel  flanges  were  adopted.  Even  as 
late  as  1876  Albert  Fink  refers  to  the  celerity  with  which  trucks 
could  be  changed  at  junction  points,  not  over  ten  minutes  being 
requisite.^  The  first  double  tracking  in  the  country,  that  of 
the  New  York  Central,  was  not  accomplished  until  the  war 
period.  There  was  not  even  a  bridge  over  the  Hudson  at 
Albany  until  1866,  and  no  bridge  at  St.  Louis,  although  the 
Northwestern  had  bridged  the  Mississippi  higher  up.  No 
night  trains  were  run  generally.  No  export  grain  trade  existed, 
although  feeble  beginnings  had  been  apparent  at  New  York 
for  some  years.  Philadelphia  did  not  even  have  a  trunk  line 
as  late  as  the  end  of  the  war;  and  neither  Boston  nor  Phila- 
delphia had  regular  steamer  lines  to  Europe.  For  the  great 
staples  of  trade,  the  canals  and  rivers  were  largely  utilized. 
The  Erie  Canal  during  the  war,  took  twice  as  much  freight  as 
the  Erie  and  New  York  Central  together.  Even  in  1865  the 
ton  mileage  of  the  Erie  Canal  —  844,000,000  —  compared 
with  a  ton  mileage  of  265,000,000  for  the  New  York  Central 
and  388,000,000  for  the  Erie  Railroad.  And  in  1872,  eighty- 
five  per  cent  of  the  freight  between  New  York  and  Philadelphia 
still  went  by  water. 

Railroad  construction  during  the  next  decade  to  1880  was 
extremely  active.  East  of  the  Mississippi  developments  were 
confined  in  the  main  to  building  branches  and  feeders.  One 
new  through  line  in  the  East  was  opened,  by  the  entrance  of 
the  Baltimore  &  Ohio  into  New  York  in  1873  and  into  Chicago 
in  the  following  year.  Another  important  enterprise  was  the 
building  of  the  Air  Line  route  to  connect  Atlanta  with  Rich- 
mond by  a  road  traversing  the  fertile  Piedmont  belt.  The 
1  U.  S.  Reports  Internal  Commerce,  1876,  App.  3L 


HISTORICAL   SURVEY  19 

completion  by  the  state  of  Massachusetts  of  the  Hoosac  Tunnel 
line,  providing  a  new  outlet  to  the  west  from  Boston,  was  also  a 
notable  achievement.  This  route  was  at  last  opened  in  1874 
after  a  painful  experience  extending  over  twenty  years,  involv- 
ing an  expenditure  by  the  state  of  about  $17,000,000.  Most  of 
the  new  railroad  building  of  the  seventies  took  place  in  the  upper 
Mississippi  valley.  The  states  of  Wisconsin,  Minnesota,  Iowa, 
(eastern)  Nebraska  and  Kansas  were  rapidly  gridironed  with 
new  hnes.  Much  of  this  construction  took  place  after  1868, 
activity  culminating  in  1871  with  the  building  of  no  less  than 
7,379  miles  of  line.  The  panic  of  1873  put  an  end  to  all  this, 
except  in  California  where  expansion  went  on  unabated.  Nearly 
one  thousand  miles  of  new  line  were  added  to  the  systems 
of  this  state  during  the  five  years  to  1878,  —  nearly  doubling 
its  mileage  during  this  period.  Elsewhere  in  the  country  little 
was  accomplished  during  the  protracted  hard  times.  In  1875, 
for  instance,  only  seventeen  hundred  miles  were  constructed. 
This  cessation  of  development  did  not  change  for  the  better 
until  the  resumption  of  general  prosperity  in  1878.  The  net 
result  of  ten  years  building  was,  nevertheless,  considerable, 
represented  by  an  expansion  from  53,000  to  upwards  of  93,000 
miles  of  line.  Railroad  building,  in  fact,  increased  about  two 
and  one-half  times  as  fast  as  population.  So  that  by  1880 
the  United  States  was  already  more  amply  furnished  with 
transportation  mileage  than  any  country  in  Europe. 

Among  the  important  events  to  be  associated  with  this 
period  was  the  opening  of  the  first  transcontinental  route, 
marked  by  the  joining  of  the  Union  and  Central  Pacific  rail- 
roads in  1869.  The  history  of  its  construction  under  liberal 
land  grants  from  the  Federal  government  belongs  in  another 
place.  Aside  from  the  political  effect,  the  economic  results 
were  immediate.  Population  at  once  flowed  over  onto  the 
Pacific  slope.  And  a  large  volume  of  trade  was  at  once  deflected 
from  the  sea  route  round  Cape  Horn.  The  value  of  goods 
shipped  by  water  between  New  York  and  San  Francisco,  which 


20  RAILROADS 

in  1869  amounted  to  $70,000,000,  fell  in  the  next  year  to 
$18,600,000,  and  in  1872  to  less  than  $10,000,000.  The  suc- 
cess of  the  enterprise,  together  with  growing  interest  in  the 
Pacific  states,  doubtless  led  to  the  opening  of  construction  of 
the  Northern  Pacific  as  a  transcontinental  route  in  1870. 

The  rapid  development  of  an  export  trade  in  grain  to  Europe 
between  1870  and  1874  was  a  direct  result  of  improvements  in 
agriculture  and  the  opening  up  of  a  surplus  grain-producing 
area.  As  yet  this  territory  lay  mainly  east  and  south  of  Chi- 
cago. Even  as  late  as  1882,  over  four-fifths  of  the  eastbound 
trunk  line  traffic  originated  not  further  west  than  Illinois. 
Wisconsin  and  Iowa  contributed  less  than  ten  per  cent,  of  this 
business.  The  methods  of  handling  wheat  were  still  quite 
primitive.  During  the  Civil  War  thousands  of  men  were 
employed  to  unload  the  grain  by  hand,  every  tenth  barrel 
being  weighed.  Elevators  had  been  used  in  Chicago  for  some 
time  but  no  eastern  city  had  them  until  1861.  Prior  to  1872, 
when  the  first  grain  elevator  was  set  up  at  Baltimore,  the  cost  of 
thus  unloading  grain  by  hand  amounted  to  four  or  five  cents 
per  bushel.  At  Boston  until  1867,  all  the  export  grain  was  still 
unloaded  back  of  the  city  and  hauled  across  to  the  waterfront. 
The  volume  of  exportable  surplus  products  of  the  country 
rose  rapidly  after  1870.  An  increase  from  five  or  six  bushels 
of  wheat  production  per  capita  in  1860,  to  nearly  nine  bushels 
in  1879,  left  a  large  margin  for  foreign  sale.  The  growth  of 
such  traffic,  big  with  importance  for  the  carriers,  is  indicated 
by  the  opposite  diagram.  The  large  total  of  59,000,000 
bushels  of  wheat  and  (equivalent)  wheat  flour  reached  in  1862, 
partly  as  a  result  of  the  closing  of  markets  in  the  southern 
states,  was  not  again  surpassed  for  more  than  a  decade.  The 
most  notable  increase  ensued  after  1873,  when  the  level  rose 
about  fifty  per  cent.,  to  become  established  thereafter  upon  a 
permanently  higher  plane.  A  second  sudden  boost  occurred 
again  in  1877  when  wheat  exports  rose  rapidly  to  a  total  of 
180,000,000  bushels  within  three  years.     The  disastrous  failure 


HISTORICAL    SURVEY 


21 


of  European  crops  in  1879,  with  a  coincident  bumper  yield  in 
the  United  States,  led  to  the  immediate  climax  of  the  movement 
in  1881.  These  exports,  moreover,  which  fifty  years  earlier, 
owing  to  the  cost  of  carriage,  were  almost  exclusively  in  the 
form  of  flour,  were  now  in  1880  about  three-fourths  constituted 
of  raw  wheat.  Examination  of  the  diagram  with  its  steep 
pyramid  of  development  at  this  time  is  convincing  as  to  the 
stimulus  thereby  given  to  the  railway  interests.  Foreign  trade 
in  cattle  and  beef  products  also  enormously  increased  during 


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these  years.  In  1876  only  244  steers  were  exported,  while  in 
1877,  71,794,  and  in  1881,  134,000  head  were  shipped  abroad. 
The  value  of  preserved  meats  exported  quadrupled  in  one  year 
after  1877,  and  grew  eightfold  by  1880.  Doubtless  part  of 
this  disposition  of  products  abroad  during  the  seventies  was 
due  to  a  cessation  of  demand  at  home  owing  to  the  prevalent 
hard  times;  but  the  important  discovery  was  incidentally 
made  that  the  demand  abroad  existed,  and  merely  required 
cheap  transportation  for  its  successful  development. 

The  second  step  necessary  for  permanently  developing  rail- 
road business  was  a  lowering  of  the  charges.  This  was  first 
brought  about  during  the  seventies  through  unregulated  com- 


22  RAILROADS 

petition  between  the  trunk  lines.  The  fiercest  warfare  occurred 
during  the  years  immediately  following  the  entrance  of  the  Balti- 
more and  Ohio  and  the  Grand  Trunk  railroads  into  Chicago  in 
1874.  This  was  some  five  years  after  the  Pennsylvania  and  the 
New  York  Central  had  consolidated  their  through  lines  to  the 
same  point.  These  two  original  rivals  had  already  slashed 
rates  indiscriminately.  Charges  of  SI. 88  and  82  cents  for  first- 
and  fourth-class  freight  from  Chicago  to  New  York  in  1868, 
had  already  for  a  brief  period  in  the  following  year  dropped  to 
a  uniform  rate  of  twenty-five  cents  for  all  business.  As  Hadley 
justly  observes,  such  rates  could  not  long  prevail;  and  for  the 
next  few  years  nominal  rates  of  one  dollar,  and  one  dollar  and 
fifty  cents  for  first  class,  and  sixty  and  eighty  cents  for  fourth 
class  obtained.  The  outbreak  of  open  warfare  between  the 
Baltimore  &  Ohio  and  the  Pennsylvania  over  the  charges  made 
by  the  latter  for  the  use  of  its  lines  between  Philadelphia  and 
New  York,  occurred  in  1874.  Grain  rates  of  sixty  cents  per 
hundred  pounds  from  Chicago  to  New  York  during  1873  fell 
to  forty  cents  in  1874  and  to  thirty  cents  in  1875.  Special  or 
commodity  rates  were  often  as  low  as  twelve  cents.  After  a 
year's  truce,  only  partially  observed  by  the  leading  participants, 
discord  again  prevailed  during  1876.  The  commercial  rivalries 
of  seaboard  cities  now  became  involved.  Different  or  specially 
favorable  rates  had  been  accorded  to  Baltimore  and  Phila- 
delphia as  compared  with  New  York  since  1869.^  Rates 
finally  fell  lower  than  ever  before.  This  was  especially  true  of 
grain.  The  published  rate  in  March,  1876,  was  forty-five  cents 
per  hundred  pounds  from  Chicago  to  New  York.  In  May  it 
fell  to  twenty  cents  —  a  rate  almost  as  low  as  prevails  today 
with  all  modern  improvements  in  methods  of  conducting  the 
business.  Westbound  rates  dropped  correspondingly.  Quo- 
tations from  New  York  to  Chicago  at  twenty-five  cents  per 
hundred  pounds  first  class,  and  sixteen  cents  fourth  class  were 
freely  given.     Actual  rates  were  often  much  lower  than  this. 

1  Pp.  361  and  404,  infra. 


HISTORICAL   SURVEY  23 

Rival  cities  again  intervened  and  finally  the  whole  matter  was 
of  necessity  referred  for  arbitration  to  a  commission.  Even 
then  both  the  Erie  and  the  Baltimore  &  Ohio  roads  were  well 
advanced  on  the  road  to  bankruptcy.  For  us,  however,  the 
immediate  result  of  importance  was  a  permanent  reduction 
of  the  general  level  of  freight  rates,  not  alone  for  the  trunk  line 
territory  but  for  the  entire  country.  The  diagram  on  page  413 
shows  this  plainly.  From  an  average  revenue  per  ton  of  freight 
moved  one  mile  of  1.92  cents  in  1868,  intermittently  upheld 
until  1872,  the  fall  of  over  one-third  to  about  1.1  cents  in  1882 
was  sudden  and  continuous.  The  end  was  not  yet.  The 
renewed  outbreak  of  a  rate  war  between  the  trunk  lines  in  1881 
and  again  in  1884  led  to  further  reductions.  The  decision  in 
1882  of  the  Thurman  Commission  on  Differentials  settled 
nothing.^  All  kinds  of  traffic  were  affected.  Immigrants  were 
carried  from  New  York  to  Chicago  for  $1.00  a  head.  East- 
bound  grain  rates  were  as  low  as  eight  cents.  At  last,  late  in 
1885,  the  warfare  was  terminated  by  an  elaborate  pooling 
agreement.  These  struggles  brought  about  great  reductions 
in  the  revenue  of  the  carriers  concerned;  but  declines  in  rates 
after  this  period  were,  in  the  main,  more  gradual,  with  short 
intervals  of  relief  interspersed. 

One  immediate  result  of  these  lower  freight  rates  was  the 
impetus  given  to  economy  and  systematic  operation.  This  is 
the  period  when,  as  we  have  said,  pooling  as  a  device  for  re- 
straint of  competition  first  appeared  in  the  "Evening"  con- 
tracts on  beef  shipments  in  the  West,  in  the  notable 
Southern  Railway  &  Steamship  Association  in  1874  and 
in  the  trunk  line  pool  in  1877.  Agreement  between  the 
anthracite  coal  roads  began  about  1872  and  has  continued 
with  increasing  effectiveness  ever  since.^  This  was  also  the 
heyday  of  the  through  freight  lines  which  were  now  oper- 
ating from  every  important  western  centre.  In  1876  the 
first   attempt   at    a    systematic   scheme   of    rate   adjustment 

^  P.  404,  infra.  ^  Pooling  is  discussed  in  vol.  II. 


24  RAILROADS 

between  competing  localities  was  made  in  trunk  line 
territory.^  Order  was  indeed  emerging  out  of  chaos.  In 
respect  of  operation,  larger  locomotives  and  cars  and  longer 
trains  were  rapidly  coming  into  use.  On  the  Lake  Shore  the 
average  train  load  in  1870  was  137  tons.  Nine  years  later  it 
had  risen  to  213  tons.  The  widespread  substitution  of  steel 
for  iron  rails  was  not  yet  to  follow  for  some  time.  For  in  1880 
only  three-tenths  of  the  mileage  of  the  country  was  laid  with 
steel.  This  proportion  rose  to  eight-tenths  in  1890.  It  was 
doubtless  this  change  during  the  eighties  which  made  possi- 
ble the  heavy  decrease  in  operating  expenses  which  occurred 
during  the  j&ve  years  subsequent  to  1881.  It  appears,  indeed,  as 
if  the  need  of  economy  was  enforced  by  the  decline  of  rates  in 
progress;  but,  as  usual,  the  supply  of  economies  waited  upon 
the  demand  and,  in  fact,  tarried  well  behind  it.  To  this  cir- 
cumstance may  be  attributed  some  of  the  financial  hardships 
suffered  by  the  roads  during  the  ensuing  interval  between  the 
reduction  of  rates  during  the  seventies  and  the  mechanical  im- 
provements of  the  succeeding  decade.  An  incidental  result  of 
the  rate  wars  of  this  period,  it  may  also  be  noted,  was  the  read- 
justment of  the  relative  shares  of  the  great  seaports  in  foreign 
business.  Philadelphia,  especially,  increased  its  quota  of 
exports  from  about  eleven  per  cent,  in  1860  to  over  twenty 
per  cent,  in  1880.  Much  of  this  was  gained,  however,  from  the 
southern  ports,  as  the  relative  status  of  Baltimore,  New  York, 
and  Boston  remained  about  the  same. 

A  second  important  consequence  of  the  severe  decline  in 
railroad  rates  during  the  seventies,  was  the  permanent  su- 
persession of  canals  and  riverways  in  favor  of  railroads  as  means 
of  transportation.  The  Erie  Canal  outlasted  all  the  other 
artificial  water  routes,  most  of  which  had  succumbed  to  rail 
competition  by  the  close  of  the  Civil  War.  But  even  as  late 
as  1868,  practically  all  of  the  grain  arriving  at  New  York  came 
by   canal.     The   change,   when   it   occurred,   came   suddenly. 

*  Chapter  X,  infra. 


HISTORICAL   SURVEY 


25 


No  canal  could  meet  the  fierce  slashing  of  rates  which  suddenly 
supervened  on  the  rail  lines.  Since  1855,  when  the  canal 
carried  twice  the  traffic  of  all  the  trunk  lines,  until  1861-1862 
when  the  rail  and  water  lines  were  about  even,  the  railroads 
had  steadily  gained  in  tonnage.^  The  turning  point  was 
reached  in  1872  when  the  canal  traffic  actually  began  to  decline. 
Between  1871  and  1876  the  aggregate  tonnage  (both  ways)  on 
the   New   York   canals   fell   away   about   half,    spasmodically 


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recovered  during  the  great  expansion  of  exports  in  1879-1880, 
held  constant  for  five  years,  and  thereafter  steadily  dwindled 
away.  As  the  accompanying  diagram  shows,  the  rise  of  rail- 
road tonnage  was  rapid  up  to  1873.  Thereafter  for  several 
years  during  the  actual  panic,  despite  the  railroad  wars  and 
low  rates,  no  great  change  occurred.  But  by  1876,  eighty- 
three  per  cent,  of  all-grain  receipts  at  Atlantic  ports  came  by 
rail;  and  over  nine-tenths  of  all  the  commerce  between  East 
and  West  had  left  the  water  routes.     At  New  York  the  three 

1  Report  of  Committee  on  Canals  of  New  York  State,  1899,  gives 
elaborate  statistical  data.  C/.  especially  table  14.  Also  Eep.  U.  S. 
Internal  Commerce,  1881,  p.  179,  and  1884,  p.  5. 


26  RAILROADS 

main  railroads  carried  six  times  the  traffic  of  all  the  state  canals 
in  1880.  After  that  time  the  canal  barges  were  loaded  only 
with  coal,  lime,  sand,  cement,  and  similar  low-grade  traffic. 
So  that  in  the  rapid  expansion  of  business,  which,  as  our  dia- 
gram shows,  occurred  after  1878,  the  canal  shared  not  at  all. 
The  disparity  between  east-  and  westbound  tonnage  was  not- 
ably great.  In  1870  this  eastbound  traffic  was  about  three 
times  as  great  as  the  tonnage  west  bound.  In  1881  it  was 
seven  and  one-half  times  as  great,  declining  thereafter  to  a 
proportion  of  about  6.5  to  1  during  the  late  nineties.  This 
inequality,  of  course,  whetted  the  appetite  of  the  carriers  for 
back  loads  to  fill  the  westbound  trains,  and  undoubtedly 
gave  an  impetus  to  rate  disturbance.  The  rate  wars  led  by 
the  New  York  Central  during  1881  were  largely  due  to  this 
fact. 

As  for  water  carriage  elsewhere,  the  rivers  soon  followed 
the  canals  in  steady  decline  of  relative  importance.  On  the 
southern  streams,  such  as  the  Cumberland  and  Tennessee,  the 
principal  diversion  to  the  railroads  of  traffic  in  food-stuffs 
south  bound  from  the  West,  took  place  in  the  five  years  subse- 
quent to  1866.^  High-water  mark  in  the  Mississippi  trade  was 
reached  in  1879,  the  year  of  the  completion  of  the  jetties  for 
the  improvement  of  navigation  at  the  mouth  of  the  river.  A 
steady  decline  thereafter  has  ensued  down  to  the  present  da}^ 
New  Orleans  had  then  only  recently  engaged  in  foreign  trade 
in  grain.  Exports  of  wheat  and  flour  (equivalent)  had  sud- 
denly risen  from  less  than  1,000,000  bushels  in  1875  to  over 
12,000,000  bushels  in  1880.  At  this  time  this  came  principally 
by  river.  It  was  nearly  ten  years  later  before  the  Illinois 
Central  actively  engaged  in  such  export  business.  But  when 
the  railroads  finally  seized  upon  it,  the  river  trade  was  doomed. 
The  only  exception  to  this  decrease  of  inland  water  transporta- 
tion occurred  on  the  Great  Lakes.  The  carriage  of  coal,  iron 
ore,  and  lumber  rapidly  increased.  Through  the  Detroit  river, 
^  U.  S.  Reports  on  Internal  Commerce,  1876,  App.  p.  29. 


HISTORICAL    SURVEY  27 

the  tonnage  grew  from  9,000,000  in  1873  to  20,000,000  tons 
in  1880;  and  through  the  St.  Mary's  Canal  from  403,000  in 
1860  to  1,734,000  tons  in  1880.  Inasmuch  as  a  fair  proportion 
of  this  rapidly  growing  business  was  ultimately  destined  to  reach 
the  seaboard  either  as  raw  material  or  in  the  form  of  manufac- 
tures, this  water  traffic  contributed  to,  rather  than  lessened 
the  prosperity  of  the  trunk  lines  operating  east  of  the  lakes. 

The  growing  importance  of  railroads  during  the  seventies 
was  accompanied  by  collateral  developments,  which  deserve 
mention  in  a  general  preliminary  survey.  The  abuses  of  per- 
sonal discrimination  and  favoritism,  constantly  recurring  rate 
wars  and  disturbances,  the  financial  scandals  of  construction 
companies  and  subsidiary  corporations,  the  frauds  perpetrated 
by  unscrupulous  financiers  like  Gould  and  Fiske,  coupled  with 
the  arrogance  of  railroad  managements,  aroused  widespread 
public  hostility.  This  led  to  an  insistent  demand  for  public 
regulation  and  control.  The  Granger  movement  formed  its 
open  expression  in  the  western  states.  The  searching  inquiries 
of  the  famous  Hepburn  Committee  of  the  New  York  legislature 
in  1879  voiced  it  in  the  East.  The  Windom  report  of  1874 
was  called  forth  on  behalf  of  the  Federal  government.  The 
first  railroad  commission,  that  of  Massachusetts  in  1869,  was 
soon  followed  by  others  all  over  the  country.  And  a  campaign 
of  education  was  set  under  way  which  finally  led  to  the  Federal 
inquiries  of  the  Cullom  Committee  of  1886  and  the  Federal 
Act  to  Regulate  Commerce  of  the  follo"wing  year. 

The  decade  of  the  eighties,  so  far  as  common  carriers  are 
concerned,  was  primarily  characterized  by  new  railroad  con- 
struction. Over  70,000  miles  of  line  were  built  in  ten  years,  — 
a  mileage  just  about  equal  to  the  total  new  construction  for 
both  the  ten  preceding  and  the  ten  following  years  combined. 
The  movement  culminated  in  1882,  and  again  in  1887,  in  two 
veritable  crazes  of  promotion  and  speculative  activity,  un- 
equalled before  or  since  in  our  railroad  history.     The  first  was 


28  RAILROADS 

suddenly  stopped  by  a  short,  sharp  railroad  panic  in  1884. 
Jay  Gould's  operations  in  Union  and  Kansas  Pacific  set  a  pace 
for  manipulation  and  fraud,  which  could  have  no  other  sequel. 
The  second  craze  was  doubtless  in  part  restrained  by  the  moral 
effect  of  the  passage  in  1887  of  the  Act  to  Regulate  Commerce; 
although,  viewed  in  a  larger  way,  it  was  more  directly  due  to 
the  exhaustion  both  of  the  supply  of  capital  and  of  confidence 
among  investors.  These  two  outbreaks  of  railroad  promotion 
are  deserving  of  further  comment,  both  by  reason  of  their 
extent  and  character.  Prior  to  1880,  new  railroads  constructed 
had  averaged  a  little  over  two  thousand  miles  annually.  The 
figures  for  1881-1882,  respectively,  were  6,711  and  9,846  miles, 
rising  finally  to  a  total  of  11,569  miles  in  1882.  This  record 
has  never  been  surpassed  but  once:  when,  four  years  later  at 
the  height  of  the  second  "boom,"  12,983  miles  of  new  line  were 
laid  down.  A  large  part  of  this  building  was  in  the  Far  West 
and  Southwest,  these  regions  being  now  opened  up  as  the  upper 
Mississippi  valley  had  been  developed  between  1868  and  the 
panic  of  1873.  A  second  transcontinental  route  was  opened 
in  1881,  through  the  joining  of  the  Southern  Pacific  and  Atch- 
ison Topeka  and  Santa  Fe  roads  at  Deming  and  El  Paso. 
Within  two  years  thereafter  two  direct  routes  to  connect  the 
Southern  Pacific  system  with  New  Orleans  were  completed. 
The  Pacific  Northwest  was  admitted  to  rail  connection  with 
the  rest  of  the  country  in  1883-1884,  by  two  significant  events. 
The  Northern  Pacific  road  was  then  opened,  and  the  Oregon 
Short  line  to  connect  the  Columbia  river  basin  with  the  Union 
Pacific  system.  The  Great  Northern  road  reached  the  Pacific 
slope  in  the  year  1893,  accompanied  by  the  Canadian  Pacific, 
constructed  just  over  the  border.  This  activity  in  far  west- 
ern railroad  building  was  mainly  duo  to  the  growth  of  the 
Pacific  slope;  but  it  was  also  favored  by  the  successful  competi- 
tion of  railways  with  the  water  routes  round  Cape  Horn.  It  was 
estimated  that  as  late  as  1878,  not  over  one  quarter  of  the  total 
tonnage  moved  into  California  went  by  rail.     But  the  railroads 


HISTORICAL   SURVEY  29 

then  inaugurated  a  system  of  special  contracts  by  which  ship- 
pers who  agreed  to  use  the  railroads  exclusively,  were  given 
considerably  reduced  rates.  By  1884  when  the  plan  was  dis- 
continued, the  percentage  of  tonnage  carried  to  California  by  rail 
rose  from  twenty-five  to  between  sixty  and  seventy-five  per  cent. 
In  the  eastern  states,  the  eighties  was  the  period  of  specula- 
tive "parallelling"  of  existing  lines  of  road,  in  order  to  dragoon 
the  older  lines  into  purchasing  the  new  ones  at  extortionate 
prices.  This  was  done  under  the  guise  of  affording  satisfaction 
to  the  popular  outcry  for  competition  as  a  means  of  reducing 
rates.  Two  notable  instances  were  the  building  of  the  West 
Shore  road,  paralleling  the  New  York  Central;  and  of  the 
Nickel  Plate  line  which  similarly  ran  for  miles  within  a  few  rods 
of  the  Lake  Shore  across  northern  Ohio.  The  fact  was  that 
the  prolonged  period  of  depression  during  the  seventies  had 
brought  about  an  accumulation  of  surplus  capital  awaiting 
investment.  The  rapid  repayment  of  its  debt  by  the  United 
States  government,  also  released  a  large  supply  of  funds. 
General  prosperity  prevailed  and  prices  were  everjTvhere 
rising.  This  increase  of  prices,  extending  from  commodities 
to  all  issues  of  stocks  and  bonds,  reduced  the  rate  of  return 
upon  investment  for  these  new  supplies  of  capital  in  all  the 
older  enterprises.  The  only  alternative,  in  seeking  for  a 
liberal  return  on  investments,  was  to  risk  it  in  new  ventures. 
Speculation  ran  riot.  All  sorts  of  projects  were  eagerly  taken 
up,  and  among  these,  new  railroads  were  most  important. 
They  were  freely  built,  far  in  advance  of  population  in  the 
West^  or  of  prospective  needs  for  enlargement  in  the  East,  not 
so  much  sometimes  to  develop  the  country,  as  to  enrich  the 
promoters.  That  they  ultimately  served  the  pubhc  interest 
was  not  the  main  concern  in  too  many  instances.  This  was 
also  the  heyday  of  the  fraudulent  construction  company, 
already  so  ably  utilized  by  the  builders  of  the  Pacific  roads. ^ 

1  More  fully  treated  in  the  chapters  on  speculation  and  finance  in  the 
second  volume. 


30  RAILROADS 

In  short,  speculation  in  every   conceivable   form  ran  riot  in  a 
way  not  repeated  thereafter  for  nearly  twenty  years. 

Aside  from  rampant  speculation,  American  railroad  history 
during  the  eighties  must  record  various  other  economic  events 
of  importance.     The  city  of  New  York  and  the  New  York 
Central  Railroad  were  at  the   culmination  of  their  relative 
importance  in  the  export  trade  of  the  country.     The  volume 
of  eastbound  tonnage  was  enormous  in  the  early  eighties.      In 
1881,  2,500,000  tons  of  freight  east  bound  were  carried  by  the 
New  York  Central  alone,  a  figure  surpassed  in  only  two  years 
until    1896.     Another   event   of   importance   was  the  general 
westward  drift  of  population  and  agriculture.     This  was  accom- 
panied by  a  corresponding  migration  of  manufactures  inland 
from  the  Atlantic  seaboard.     The  lines  from  the  Central  West 
to  the  South,  such  as  the  Illinois  Central  and  the  Cincinnati, 
New  Orleans  &  Texas  Pacific  road,  had  formerly  relied  almost 
entirely  upon  the  carriage  of  grain  or  flour  and  packing-house 
products  from  the  farms  of  Ohio,  Indiana,  and  Illinois  to  the 
cotton-raising  South.     During  the  latter  half  of  the  eighties 
they  carried  an  ever  increasing  proportion  of  manufactured 
goods,  such  as  boots  and  shoes,  clothing,  wooden  ware,  harnesses 
and  groceries,— in  fact  everything  denoted  by  the  words  general 
merchandise.     More  and  more  the  supplies  of  grain,  flour  and 
packing-house  products    were  being  produced  in  Iowa,   Ne- 
braska, and  Kansas,  while,  larger  quantities  of  general  mer- 
chandise originated  in  the   Middle  West.     The  result  was  a 
need  for  new  diagonal  trunk  lines  from  such  points  as  Kansas 
City  and  Omaha  into  the  lower  Mississippi  valley.     The  decline 
of  Cincinnati  as  a  great  pork-packing  centre  dates  from  this 
time.    Memphis   and   Vicksburg   derived   a   new   importance 
at  the  junction  of  such  lines  as  the  Kansas  City,  Memphis  & 
Birmingham  with  the  older  Mississippi  river  roads.     At  about 
this  time,  in  1889,  also,  occurred  the  opening  of  the  Gulf  ports 
for  the  export  of  the  surplus  grain  products  of  the  territory 
west  of  the  Mississippi.    The  significance  of  this  for  the  eastern 


HISTORICAL   SURVEY  31 

trunk  lines  did  not  appear  until  later;  but  the  occurrence  forms 
a  part  of  that  westward  trend  of  population  above  mentioned. 
These  years  were  all  characterized  by  the  increasing  importance 
of  long-distance  through  business,  as  distinguished  from  mere 
local  trade.  The  markets  of  the  country  as  a  whole,  the  areas 
of  commercial  competition,  were  steadily  expanding.  Viewed 
in  a  large  way,  it  was  doubtless  this  economic  phenomenon  which 
at  this  time  emphasized  the  need  of  centralized  Federal  control, 
instead  of  state  regulation,  if  control  there  were  to  be.  This 
found  its  expression  in  the  passage  by  Congress  of  the  Inter- 
state Commerce  Act  of  1887. 

A  phenomenon  of  national  importance  was  the  rapid  ex- 
pansion of  export  trade  in  staple  commodities,  through  New 
Orleans,  Galveston  and  other  Gulf  ports.  This  began  in  1889 
when  the  Illinois  Central  first  engaged  in  export  business  in 
grain.  It  soon  assumed  considerable  proportions,  with  the 
growth  of  population  and  agriculture  in  the  southwestern  part 
of  the  United  States;  and,  with  the  completion  of  the  Panama 
Canal  in  1913,  will  doubtless  be  even  more  notable  in  future. 
The  opening  of  new  railway  connections  with  these  Gulf  ports 
about  1896  led  to  still  further  expansion  of  this  trade.  An 
immediate  result  was  of  course  a  dechne  in  the  relative  im- 
portance of  the  great  Atlantic  seaports,  particularly  New  York. 
A  growing  appreciation  of  this  fact  is  accountable  for  the  great 
interest  in  New  York  state  in  projects  for  enlarging  the  Erie 
Canal.  A  few^  figures,  together  with  the  diagram  on  the  next 
page,  illustrate  the  situation.  A  generation  ago  about  nine- 
tenths  of  our  exports  of  wheat  and  about  seven-tenths  of  our 
exports  of  flour,  went  out  through  the  port  of  New  York.  In 
1899  less  than  one-half  of  our  wheat  and  less  than  one-third  of 
our  flour  was  exported  through  the  same  cit3\  The  larger  part 
of  this  loss  ensued  after  1896,  with  the  opening  of  new  lines  to 
the  Gulf  ports  as  above  mentioned.  The  New  York  Commerce 
Commission  in  its  report  for  1900  found  that  for  1899,  w^hile 
the  nation's  total  foreign  shipments  of  W'heat  was  larger  than 


32 


RAILROADS 


at  any  time  since  1892,  New  York  actually  exported  twenty 
million  bushels  less  than  seven  years  earlier.  Exports  in  1900 
were  the  smallest  in  her  history,  forming,  that  is  to  say,  the 
lowest  proportion  of  the  total  exports  of  the  United  States. 
They  were  actually  about  a  million  bushels  of  wheat  less  than 
went  out  through  the  two  principal  Gulf  ports.  An  indirect 
result  of  this  growth  of  New  Orleans  and  Galveston  was  an  in- 
tense competition  between  all  the  Atlantic  trunk  lines  interested 
in  the  eastern  seaports  and  the  railroads  tributary  to  the  Gulf 
of  Mexico.     The  part  of  the  country  most  affected  by  this 


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00 

19 

05 

1910 

competition,  of  course,  was  that  portion  about  equi-distant 
from  the  two  sea  coasts.  This  rivalry  led  to  rate  wars  on  a 
scale  not  witnessed  before  since  the  trunk  line  struggles  during 
the  seventies.  St.  Louis,  Kansas  City  and  all  the  region 
thereabouts,  enjoyed  the  benefit  of  ruinously  low  rates  as  a 
consequence,  —  an  advantage  not  accorded  to  other  parts  of 
the  country.  One  cannot  doubt  that  this  factor  was  most 
influential  in  encouraging  the  growth  of  their  population  and 
trade. 

The  development  of  the  Gulf  ports  more  recently,  together 
with  the  situation  respecting  rate  wars  on  export  grain,  is  still 
further  indicated  by  the  chart.  When  New  Orleans  in  1891 
considerably  increased  its  business  through  the  activities  of 


HISTORICAL   SURVEY  33 

the  Illinois  Central  Railroad,  it  speedily  developed  that  climatic 
conditions  led  to  saturation  of  the  grain  with  moisture  in  the 
vessels'  holds.  This  fact,  together  with  other  difficulties,  dis- 
couraged progress.  But,  for  a  time,  with  the  revival  of  foreign 
commerce  in  1897,  both  the  Gulf  and  Atlantic  ports  shared  in  the 
greatly  increased  business.  Galveston  had  now  come  into  the 
field;  and  at  times  surpassed  New  Orleans  in  importance  by 
virtue  of  the  development  of  wheat  fields  in  the  Southwest. 
But  the  over-weening  ambition  of  these  Gulf  ports,  threatening 
as  they  did  the  supremacy  of  New  York,  led  to  intense  rivalry. 
All  the  lines  to  the  Gulf  became  finally  pitted  against  all  the 
trunk  lines  serving  the  Atlantic  seaboard.  The  advantage  for 
two  or  three  years  seemed  to  he  with  the  southern  lines;  and, 
as  the  chart  indicates,  in  1903-1904  grain  exports  through  New 
Orleans  and  Galveston  actually  exceeded  those  of  any  other 
ports.  After  the  utter  collapse  of  export  business  in  1905, 
trouble  once  more  threatened  to  break  out;  but  it  was  fortu- 
nately averted  by  a  compromise  effected  in  1906.  The  Gulf 
lines  on  through  freight  demanded  a  substantial  differential 
to  offset  certain  disabilities,  such  as  the  longer  haul,  poorer 
ser\dce  and  climatic  damage  to  which  they  were  exposed.  The 
trunk  lines  successfully  met  this  contention  in  part,  and  finally 
brought  about  a  peaceful  settlement  of  the  difficulty.  Under 
this  arrangement  of  a  small  differential  in  favor  of  the  Gulf, 
New  York,  as  the  chart  shows,  has  once  more  resumed  its 
preeminence  as  compared  with,  the  rest  of  the  country.  But 
of  late  the  ever-lessening  volume  of  surplus  American  grain 
for  export  to  Europe^  has  rendered  the  question  of  far  less 
importance  than  at  one  time  it  threatened  to  assume. 

The  rapid  growth  and  development  of  the  Canadian  rail- 
roads and  ports  has  also  been  notable  in  recent  years.  The 
Grand  Trunk  Railway  was  a  factor  in  Chicago  business  from 
the  very  first;  and  had  to  be  reckoned  with  in  all  trunk  line 
rate  adjustments.  The  dressed  beef  rate  war  of  1887  proved 
1  Cf.  the  diagram  on  p.  21,  supra. 

VOL.  1—3 


34  RAILROADS 

this  fact.  But  a  new  era  of  Canadian  competition  was  inaug- 
urated with  the  opening  by  the  Canadian  Pacific  of  the  so-called 
"Soo"  route  in  1890,  across  the  straits  of  Mackinac,  thus 
opening  a  short  line  from  St,  Paul  and  Minneapolis  to  the  East. 
Persistent  rate  wars  during  the  next  few  years,  particularly 
1892-1893,  finally  led  to  recognition  of  the  claims  of  this  lien 
by  the  trunk  lines.  ]\Iuch  business  was  undoubtedly  diverted 
from  Chicago.  Between  1884  and  1891  the  flour  shipped  from 
Minneapolis  increased  over  fifty  per  cent.,  yet  the  proportion 
going  by  way  of  Chicago  largely  decUned.  Much  of  this 
business,  of  course,  ultimately  reaches  the  seaboard  by  the 
combined  Lake  and  rail  routes;  but  a  large  part  goes  out 
through  Canada  during  the  open  season.  Yet,  on  the  other 
hand,  it  is  equally  true  that  the  wonderful  development  of  the 
Canadian  Northwest  since  1905,  contributes  in  many  ways  to 
the  prosperity  of  American  carriers  and  seaports. 

As  for  new  railroad  construction  since  1890,  as  shown  by 
the  statistical  chart  on  page  78,  it  has  been  proportionately 
much  slower  than  during  the  eighties.  From  about  five  thou- 
sand miles  laid  down  in  1890,  a  drop  ensued  to  less  than  two 
thousand  miles  in  each  of  the  four  years  of  depression  after 
1893.  And  the  former  rate  was  not  resumed  until  1901,  since 
which  time  construction  has  ranged  about  six  thousand  miles 
annually.  This  slackened  rate  of  growth  during  the  last 
fifteen  years  is  an  indication  of  a  fact  of  great  importance. 
The  country  as  a  whole  with  almost  250,000  miles  of  line  in  1911 
seems  to  be  fairly  well  supplied  with  transportation  routes. 
It  seems  as  if  the  main  trunk  lines  and  systems  had  now  been 
provided,  leaving  for  the  future  the  problem  of  constructing 
branches  and  feeders  and  of  increasing  facilities  upon  the  main 
lines  already  built  by  duplication  of  tracks  and  enlargement  of 
terminals.  A  comparison  of  the  rates  of  growth  of  mileage 
and  traffic,  or  of  density  of  traffic,  shows  how  new  construction 
is  lagging  behind  the  development  of  business.  Present  con- 
ditions may  best  be  shown  by  a  few  figures.     The  total  mileage 


HISTORICAL   SURVEY  35 

of  the  United  States  is  nearly  equal  to  a  ten  track  railroad 
completely  encircling  the  globe.  The  United  States  had 
already  in  1900  about  forty  per  cent,  of  the  aggregate  mileage 
of  the  world,  considerably  exceeding  the  total  mileage  of  all 
the  countries  of  Europe  combined.  The  situation  may  be 
illustrated  in  another  way,  by  reference  to  the  relation  of  mile- 
age to  population  and  area.  Europe  in  1902  had  about  7.4 
kilometres  of  line  to  every  10,000  inhabitants,  as  compared 
with  41.4  kilometres  (twenty-six  miles)  for  the  United  States. 
This  shows  that  proportionately  to  population  the  United 
States  is  about  six  times  as  well  equipped  with  railroads  as 
Europe.  Similar  results  appear  with  reference  to  superficial 
area.  As  compared  with  Europe  alone,  we  have  about  two- 
thirds  as  much  mileage  to  every  square  mile  of  territory,  despite 
the  fact  that  our  density  of  population  is  only  about  one- 
seventh  of  that  of  Austria  Hungary  —  one  of  the  most  sparsely 
populated  countries  in  Europe.  These  figures  show  conclu- 
sively that  our  railroad  problems  for  the  future  will  be  mainly 
concerned  with  accommodating  the  huge  volume  of  existing 
traffic  along  the  routes  already  built,  rather  than  in  seeking  to 
develop  new  ones  to  parallel  the  old. 

Several  essential  peculiarities  of  American  railroad  develop- 
ment stand  out  in  sharp  relief  by  comparison  with  the  experi- 
ence of  Europe.  The  most  significant,  perhaps,  is  the  large 
amount  of  public  participation  in  construction,  evinced  through 
liberal  grants  of  aid  in  lands,  credit  and  cash  by  both  the  state 
and  Federal  governments.  The  huge  aggregate  of  these  state 
subventions  is  not  generally  appreciated.  Because  our  rail- 
roads are  now  private  concerns,  so  far  at  least  as  legal  title  is 
concerned,  it  is  too  often  assumed  in  public  discussion  that 
they  owe  their  existence  solely  to  private  initiative  and  enter- 
prise. With  all  credit  to  their  sturdy  builders,  to  whose  vision 
and  courage  so  much  is  due,  the  plain  historical  fact  remains 
that  the  people  of  the  United  States  have  had  a  large  share  in 


36  RAILROADS 

the  great  task  of  creating  our  present  railway  net,  —  not  in- 
directly alone,  through  settlement  of  the  virgin  territory,  but 
immediately  and  directly  through  land  grants  and  subventions.^ 
The  total  of  land  grants  by  state  and  Federal  governments 
in  aid  of  railroads,  according  to  the  most  careful  estimates,  is 
approximately,  155,000,000  acres,  —  that  is  to  say,  about 
242,000  square  miles.  The  United  States  alone  is  believed  to 
have  given  about  26,000,000  acres  or  40,000  square  miles.  For 
purposes  of  comparison,  the  following  table  of  present-day  areas 
is  useful. 

German  Empire 208,000  sq.  miles 

France    204,000  sq.  miles 

Texas 265,000  sq.  miles 

New  England  States 66,000  sq.  miles 

Illinois    56,000  aq.  miles 

Belgium 11,000  sq.  miles 

Massachusetts 8,300  sq.  miles 

It  thus  appears  that  a  gift  of  territory  greater  by  about  one- 
fifth  than  the  entire  area  either  of  the  German  Empire  or 
France,  almost  equal  in  size  to  the  state  of  Texas  or  four  times 
the  New  England  states,  has,  at  one  time  or  another,  been 
made   in   aid   of   railroad   construction.     The  Federal   grants 

1  The  hterature  is  considerable;  in  the  form  of  special  economic  studies 
as  well,  of  course,  as  in  the  standard  histories  and  documents  already  named 
at  the  head  of  this  chapter.  The  bibhography  in  Cleveland  and  Powell 
is  to  be  commended.  The  long-promised  Economic  History  of  the  United 
States  in  preparation  by  the  Carnegie  Institution  will  doubtless  add  much. 
Among  special  references,  the  following  authors  are  typical;  titles  of  others 
being  given  in  the  Catalogue  of  the  Bureau  of  Railway  Economics,  1912, 
under  the  names  of  states. 

Wisconsin.     B.  H.  Meyer,  Bull.  Univ.  Wis.,  XII,  1892. 

Texas.     C.  S.  Potts,  Bull.  Univ.  Texas,  No.  119,  1909. 

Missouri.     J.  W.  Million,  University  of  Chicago,  1896. 

Michigan.     H.  E.  Keith,  University  of  Michigan,  1900. 

Southern  states.     U.  B.  Phillips,  History  of  Transportation,  etc.,  1908. 

Pennsylvania.     A.  L.  Bishop,  The  State  Works  of  Pcnn.,  1907. 

IlUnois.     Davidson  and  Stuv6,  History,  etc. 

Nebraska.     Quarterly  Journal  of  Economics,  VI,  p.  337  et  scq. 

On  typical  city  participations;  J.  H.  Hollander  on  the  Cincinnati 
Southern,  Johns  Hopkins  University  Studies,  1894:  U.  B.  Phillips,  op.  dt., 
on  the  Western  and  Atlantic;  on  Philadelphia,  Ringwalt,  op.  cit.:  on 
municipal  aid  in  Massachusetts,  2nd  Ann.  Rep.  Mass.  R.R.  Com.,  etc. 


HISTORICAL   SURVEY  37 

equal  about  two-thirds  of  the  area  of  the  New  England  states, 
or,  in  other  words,  are  about  five  times  the  size  of  the  state  of 
Massachusetts.  A  large  proportion  of  the  area  of  the  newer 
commonwealths  was  offered  as  a  bonus  to  railroads.  Seven 
western  states  —  including,  for  example,  Minnesota,  Iowa,  and 
Wisconsin  —  gave  away  from  a  fifth  to  a  quarter  of  their  birth- 
rights. Nebraska  donated  one-seventh,  and  California  one- 
eighth.  The  Lone  Star  state  discovered  in  1882  that  in  her 
youthful  ardor  she  had  given  away  some  8,000,000  acres  more 
than  she  possessed.^  Shall  it  ever  be  said,  in  the  face  of  such 
evidence,  that  these  common  carriers  are  private  concerns,  to 
be  administered  solely  in  the  interest  of  holders  of  their 
securities? 

As  concerns  aid  in  the  form  of  funds  or  credit,  that  is  to 
say,  through  subscription  to  railroad  stocks  or  bonds,  it  is 
hazardous  to  venture  statistics,  particularly  for  the  separate 
states  and  municipalities.  But  the  statement  ^  of  direct  ap- 
propriations and  subscriptions  to  securities  on  the  next  page  is 
as  reUable  as  any.  The  amount  of  municipal  and  local  aid  can 
only  be  a  matter  of  guess  work,  even  nominally,  to  say  nothing 
of  its  real  cash  value.  Including  everything  from  the  heavy 
investments  of  such  cities  as  Baltimore  (S3,500,000)  or  Cin- 
cinnati ($10,000,000)  down  to  those  of  little  places  like  Water- 
town,  Wisconsin,^  Avith  its  railroad  debt  of  $750,000  on  a 
population  of  7,553  souls  (SlOO  per  capita),  the  total  for  local 
aid  as  above  stated  seems  conservative  enough.  For  Massa- 
chusetts alone  no  fewer  than  171  town  and  city  bond  issues  for 
railroad  construction  were  authorized  in  the  forty  years  to 
1871.  The  municipalities  in  Wisconsin  by  1874,  despite  its 
later  settlement,  issued  about  seven  million  dollars  in  bonds 
for  similar  purposes.  As  long  as  the  state  legislatures  were 
free  to  appropriate  moneys,  they  did  so  with  a  lavish  hand; 

^  Potts,  op.  cit.,  p.  85. 

"^  Thesis  of  Miss  Ethel  Jenney  at  RadcUffe  College,  under  direction 
of  Professor  A.  B.  Hart.  '  B.  H.  Meyer,  op.  cit.,  p.  362. 


38  RAILROADS 

but  when,  as  in  Illinois  in  1848,  they  were  constitutionally 
prohibited  from  doing  so,  the  enthusiasm  shifted  to  the  lesser 
governmental  units.  Forty-three  counties  in  Nebraska,  be- 
tween 1869  and  1892,  voted  subsidy  bonds  to  railroads  to  the 
amount  of  $4,918,000.  In  the  case  of  towns  and  cities,  also, 
it  was  possible  to  play  off  one  against  another.  No  ambitious 
community  could  stand  idly  by  and  see  a  new  railroad  go  to 
a  rival  place.  There  was  no  option  but  to  vote  bonds.  And 
farmers,  as  in  Ilhnois,  who  had  no  cash,  simply  mortgaged 
their  farms.  It  is  clear  that  in  the  aggregate  these  local 
contributions  greatly  exceeded  in  amount  those  of  the  state 
and  National  governments. 

A7nounts  granted  to  railroads 

Alabama $15,800,000 

Arkansas $7,100,000 

Delaware $600,000 

Florida $4,000,000 

Georgia $4,000,000 

Illinois    $12,000,000 

Indiana    $1,800,000 

Kentucky $200,000 

Louisiana $7,700,000 

Maryland $6,800,000 

Massachusetts $41,000,000 

Michigan $3,200,000 

Minnesota $2,200,000 

Missouri $31,700,000 

New  York $5,400,000 

North  CaroUna $11,400,000 

Ohio $500,000 

Pennsylvania $12,700,000 

South  CaroHna     $5,700,000 

Tennessee    $34,100,000 

Texas   $4,800,000 

Virginia $15,400,000 

Total   (approximately)  $228,500,000 

United  States: 

Bonds $64,600,000 

Interest  to  1887 $114,000,000 

$400,000,000 
Municipal  and  local $300,000,000 

$700,000,000 


HISTORICAL   SURVEY  39 

A  true  estimate  of  the  proportions  of  this  public  aid  recog- 
nizes, of  course,  that  many  of  these  grants  possessed  only  a 
nominal  value.  The  eighty-mile  line  in  Texas,  cited  by  Potts 
as  the  recipient  of  588,000  acres  of  land,  was  glad  enough  to 
dispose  of  them  for  sixteen  cents  an  acre.  Stickney  mentions 
a  Minnesota  half-breed  member  of  the  legislature  who  took 
ten  dollars  m  cash  for  his  vote  on  a  railroad  bond  subsidy, 
rather  than  8100,000  m  capital  stock.  But,  on  the  other 
hand,  if  the  land  or  bonds  had  little  value,  the  roads  themselves 
were  actuallj'  laid  downi  at  a  very  low  cost.  It  was  the  pro- 
portion of  public  aid  to  total  real  investment  which  was  sig- 
nificant. Wisconsin  to  1874  had  officially  subsidized  its  roads 
to  the  amount  of  over  $21,000,000,  including  lands  at  three 
dollars  per  acre.  This  sum  was  sufficient  to  have  met  one-half 
the  legitimate  cost  of  construction  of  the  properties  then 
existent.  Reliable  evidence  ^  tends  to  show  that  the  state  and 
National  governments,  up  to  1870,  had  pledged  themselves  one 
way  or  another  for  a  sum  equivalent  to  one-fifth  of  the  cost  of 
construction  of  the  47,000  miles  of  line  then  in  the  United 
States.  And  approximately  another  fifth,  at  the  very  least, 
must  have  been  contributed  from  local  and  municipal  sources. 
In  point  of  time,  public  aid  by  the  states  was  quite  unevenly 
distributed. 2  Massachusetts  and  Maryland,  about  1826,  were 
the  first  to  take  notice.  But  in  the  northern  states  most  of 
the  activity  was  confuied  to  the  period  of  1837-1840;  whereas, 
in  the  South,  govermnental  subsidies  did  not  become  frequent 
until  1850.  The  whole  movement,  so  far  as  the  separate 
states  were  concerned,  came  to  an  end  about  1870;  after  which 
time,  with  the  exception  of  Massachusetts  and  Texas,  little 
more  financial  encouragement  of  the  sort  is  recorded.  In 
many  instances  the  hands  of  legislators  were  tied  by  consti- 
tutional prohibitions;  and  in  other  cases  the  railway  net  had 
been  so  far  completed  as  to  lessen  the  zeal  of  the  public  in  the 
work.  The  centre  of  interest  after  the  Civil  War,  in  fact,  is  to 
be  found  in  the  activities  of  the  Federal  government. 

^  Miss  Jennej^,  op.  cit.  ^  Bogart,  p.  219;  Coman,  p.  239. 


40  RAILROADS 

More  than  a  broad-line  sketch  of  the  land  grants  and 
subsidies  to  railroads  by  the  United  States  would  be  out 
of  proportion.^  Sporadic  grants  in  the  South  were  made 
directly  as  early  as  1835;  but  the  first  considerable  transfer 
was  made  by  act  of  Congress  in  1850.  This  statute  ceded  to 
the  state  of  Illinois  the  alternate,  even-numbered  sections  of 
land  for  six  sections  in  width  on  each  side  of  the  projected 
Illinois  Central  Railroad  and  its  branches.  The  state  then 
promptly  turned  over  these  lands  to  the  promoters  of  the 
line.  The  Federal  government  lost  nothing  by  the  trans- 
action. Rather  did  it  gain,  —  the  lands  having  been  long  in 
the  market,  —  through  the  sale  of  the  odd  sections  at  a  more 
than  doubled  price.  Similar  extensions  of  this  grant  soon  fol- 
lowed down  through  Alabama  and  Mississippi.  Then  other 
states  demanded  recognition.  Missouri,  Arkansas,  Iowa, 
Louisiana,  Wisconsin  and  Minnesota  were  in  turn  appeased. 
The  last  direct  grant  to  a  state  was  made  to  Michigan  in 
1872.  With  the  rise  of  interest  in  the  Far  West,  the  Federal 
government  during  the  Civil  War  period  inaugurated  a  new 
policy  of  direct  charter  and  subsidy.  Under  this  plan  most 
of  the  transcontinental  lines  were  built. 

The  Union  Pacific  Railroad  was  the  most  notable  benefi- 
ciary of  the  Federal  government.  Its  experience  may  be  offered 
as  typical.  By  an  act  of  1864,  twenty  alternate  sections  of 
land  per  mile  were  granted,  together  with  a  subscription  to 
junior  bonds  to  the  amount  of  $27,600,000.  With  this  sub- 
stantial encouragement  the  road  was  soon  completed.  The 
following  table  gives  details  concerning  the  succeeding  grants 
to  other  companies. ^ 

'  For  the  Federal  land  grants,  the  standard  works  of  Donaldson  and 
Sanborn  are  best.  Also,  H.  K.  White,  History  of  the  Union  Pacific  Rail- 
road, 1895:  (The  chapter  on  construction  is  reprinted  in  Ripley,  Railway 
Prol)lems,  Chap.  III.)  E.  V.  Smalley,  History  of  the  Northern  Pacific 
Railroad,  1883:  etc. 

2  Details  are  in  the  Pacific  Railroad  Commission  Report;  50th  Cong., 
1st  sess..  Exec.  Doc.  51,  9  vols.  Tiie  final  settlement  is  described  in  Quar- 
terly Journal  of  Economics,  XIII,  1899,  pp.  427-444. 


HISTORICAL   SURVEY  41 

Federal  Aid  io  Railroads 

Bonds  Lands  ($1.25  per  acre.) 

Union  Pacific    $27,200,000  $14,100,000 

Kansas  Pacific    $6,300,000  $7,500,000 

Central  Branch  (U.P.)    .  .  .  $1,600,000  $278,000 

Sioux  City  and  Pacific  ....  $1,620,000  $54,000 

Central  Pacific   $25,800,000  $10,000,000 

Western  Pacific    $1,970,000  $567,000 

$64,623,000         (about)        $32,536,000 

The  primary  investment  of  the  United  States  in  this  pioneer 
road  was  thus  considerable.  Despite  elaborate  sinking-fmid 
provisions,  the  combination  of  speculation,  fraud  and  mis- 
management in  its  affairs,  rendered  even  the  pajTiient  of 
current  interest  charges  impossible.  Matters  went  from  bad 
to  worse,  especially  after  1883  when  several  new  competitive 
routes  were  opened  —  the  Southern  and  Northern  Pacific 
roads,  the  Atchison  and  the  BurUngton.  Bankruptcy  ensued 
in  1893,  a  state  of  affairs  which,  as  it  soon  appeared,  could  not 
be  bettered  until  provision  should  be  made  for  settlement  of 
the  government's  claim.  ^  Various  proposals  for  partial  pay- 
ment proved  unsuccessful.  Until  at  last,  in  1897,  under 
threat  of  foreclosure  proceedings,  the  banking  interests  in 
charge  of  reorganization  agreed  to  a  settlement  in  full  — 
$27,200,000  principal  and  S3 1,200,000  mterest.  The  outcome 
a  year  later  on  the  Kansas  Pacific,  was  less  fortunate.  The 
United  States  received  payment  of  the  principal  of  its  lien, 
$6,300,000;  but  was  obliged  to  forego  the  interest,  amounting  to 
about  as  much  more.  Then,  in  turn,  in  1899,  the  Central  Pacific 
claim,  amounting  to  $27,855,000  principal  and  $30,957,000  in- 
terest was  disposed  of  by  being  refunded  in  notes  payable 
semi-annually  over  a  period  of  ten  years.  Thus,  with  unex- 
pected ease  and  despatch,was  the  direct  interest  of  the  United 
States  in  railroad  affairs  brought  to  a  brilliant  conclusion. 

1  A  more  detailed  account  of  the  rise  of  the  Harriman  system  is  in 
vol.  II. 


42  RAILROADS 

A  striking  characteristic  of  American  transportation  his- 
tory, emphasized  by  the  foregoing  account  of  land  grants 
and  subsidies,  is  its  essentially  speculative  character.  Rail- 
roads were  more  often  constructed  in  advance  of  population 
and  settlement  than  to  accommodate  traffic  already  in  exist- 
ence. Speculation,  as  will  appear  in  another  volume,  has 
permeated  all  of  our  railroad  finance.  In  the  early  days  the 
most  extravagant  visions  of  development  were  indulged  in  on 
all  sides.  In  the  words  of  a  Wisconsin  legislative  committee  in 
1854  protesting  against  the  passage  of  further  laws  for  the 
encouragement  of  railroad  construction:  "In  imagination 
every  acre  of  land  from  Walker's  Point  to  Snake  Hollow  has 
been  plowed,  sowed,  fenced,  and  is  bearing  forty  bushels  of 
wheat.  —  Such  estimates  are  quite  delusive.  —  It  takes  money 
to  make  railroads.  It  takes  money  to  make  the  mare  go; 
much  more  the  iron  horse."  True  indeed,  then  and  now! 
But  a  review  of  our  transportation  history  makes  it  plain  that 
without  this  national  note  of  optimism  and  adventure,  the 
vast  capital  creation  in  railroads  of  the  present  time  could 
never  have  been  called  into  being.  Pubhc  aid  and  private 
enterprise  and  sagacity  were  alike  needed  to  accomplish  the 
great  work  in  hand. 

The  dominating  events  in  our  later  economic  history,  so 
far  as  railroads  are  concerned,  have  been  the  period  of  severe 
distress  and  prostration  following  the  panic  of  1893;  a  subse- 
quent revival  of  prosperity,  with  unprecedented  demands  for 
transportation  during  the  ten  years  thereafter  until  1907; 
and  a  movement  toward  consolidation  of  the  railroad  net  into 
great  territorial  systems,  notably  during  the  two  years  after 
1898,  as  a  result  of  which  competition  was  practically  eliminated 
from  all  railroad  business.  The  long  decline  in  freight  rates 
was  succeeded  after  1900  by  a  steady  rise  of  charges;  the 
phenomenal  prosperity  and  consolidations  led  to  wild  spec- 
ulative outbreaks  on  the  stock  exchanges,  especially  in  1901 


HISTORICAL   SURVEY  43 

and  1906;  and  the  spread  of  industrial  consolidation  enorm- 
ously emphasized  the  e\dls  and  abuses  of  personal  discrimi- 
nation and  favoritism.  As  a  result  of  these  influences  there 
arose  in  turn,  after  1900,  an  irresistible  demand  for  greater 
governmental  supervision,  both  of  rates  and  of  finance.  Taken 
all  in  all,  these  later  years  have  witnessed  both  a  pubhc  and 
private  interest  in  railroads,  greater  perhaps  than  at  any 
earlier  period  of  our  history.  But  these  later  events,  aside 
from  being  set  in  their  proper  relation  to  the  whole  in  this 
preliminary  general  survey,  require  detailed  analysis  each  one 
by  itself.  Where  not  considered  within  these  covers,  they 
will  be  treated  in  a  second  volume  dealing  primarily  with 
matters  of  finance  and  corporate  organization. 

Note 

No  attempt  at  an  exhaustive  historical  account  is  herein  attempted. 
Except  as  specially  noted,  the  main  reUance  has  been  placed  upon  the 
following  standard  works:  — 

Bogart,  E.  L.     The  Economic  History  of  the  United  States,  1908. 

Callender,  G.  S.  Selections  from  the  Economic  History  of  the  United 
States,  1765-1860,  1909. 

Cleveland,  F.  A.  (and  Powell).  Raihoad  Promotion  and  Capitahza- 
tion  in  the  United  States,  1909. 

Coman,  K.     Industrial  History  of  the  United  States,  1909. 

Gephart,  W.  F.  Transportation  and  Industrial  Development  in  the 
Middle  West.  Columbia  University  Studies,  XXXIV,  1909.  (Fine 
bibliography.) 

McMaster,  J.  B.  History  of  the  People  of  the  United  States,  7  vols, 
1883-1910. 

Phillips,  U.  B.  The  History  of  Transportation  in  the  Eastern  Cotton 
Belt,  1908. 

Poor,  H.  V.  History  of  Railroads  and  Canals  in  the  United  States. 
1860. 

Ringwalt,  J.  L.  The  Development  of  Transportation  Systems  in  the 
United  States.     1888. 

Tanner,  H.  S.     Railways  and  Canals  in  the  United  States.     1840. 

Many  other  authorities,  such  as  the  Annual  Reports  upon  Internal 
Commerce  (since  1876)  have  been  consulted.  The  admirable  Catalogue  of 
Books  on  Railway  Economics,  1912,  gives  an  exhaustive  Hst.  Many  special 
contributions  to  the  forthcoming  Carnegie  Institution  Economic  History 
of  the  United  States  have  also  been  utiUzed. 

An  admirable  description  in  detail  of  early  conditions  in  the  West  ia 
reprinted  in  our  Railway  Problems,  new  edition,  chap.  II. 


CHAPTER    II 

THE  THEORY   OF  RAILROAD  RATES 

Analysis  of  railroad  expenditures,  44.  —  Constant  v.  variable  outlays,  45. 
—  Fixed  charges,  46.  —  Official  grouping  of  expenses,  46.  —  Variable 
.  expenses  in  each  group,  51.  —  Peculiarities  of  different  roads  and  cir- 
cumstances, 56.  —  Periodicity  of  expenditvu-es,  61.  —  Joint  cost,  67.  — 
Separation  of  passenger  and  freight  business,  68. 

Analysis  of  the  theory  of  railroad  rates  begins  naturally 
with  a  study  of  railroad  expenditures.  The  examination  of 
earnings  is  not  feasible  imtil  a  later  time.  For  neither  a  rail- 
road nor  a  factory  can  earn  money  until  it  has  first  liberally 
expended  it.  A  physical  plant  must  be  provided,  in  the  first 
place,  which  means  the  guarantee  of  interest  on  a  large  capital ; 
and,  secondly,  it  must  often  be  operated  unprofitably  at  the 
outset.  This  is  especially  true  in  a  new  and  undeveloped 
country  like  the  United  States;  where  demand  for  transporta- 
tion must  be  frequently  created  by  the  invasion  of  virgin  terri- 
tory, making  it  inviting  for  settlement.  Twenty  years  ago 
such  an  analysis  of  railroad  expenditures  with  any  approach 
to  precision,  owing  to  the  absence  of  scientific  data,  would  have 
been  impossible.  A  few  companies,  such  as  the  Pennsylvania, 
the  Union  Pacific  and  the  Louisville  &  Nashville,  had  indeed 
attempted  to  systematize  their  accounts;  but  there  was  no 
agreement  as  to  details,  despite  a  certain  harmony  in  questions 
of  principle.  But  since  the  passage  of  the  Act  to  Regulate  Com- 
merce in  1887,  and  largely  o\ving  to  the  work  of  Prof.  Henry 
C.  Adams  as  statistician  to  the  Interstate  Commerce  Commis- 
sion, the  matter  may  now  be  examined  profitably  in  detail. 
The  data  is  published  annually  in  a  volume  entitled  "Statistics 
of  Raihvays  in  the  United  States."  The  amplified  powers  of 
the  Interstate  Commerce  Commission  since  1906  have  consid- 


THEORY  OF  RAILROAD  RATES  45 

erably  changed  the  system  m  force  since  the  original  law  of 
1887;  but  the  general  principles  remain  michanged.^  One 
feature  of  the  new  law,  however,  is  important.  Not  only  must 
detailed  reports  be  periodically^  and  promptly  made;  but  no 
company  is  now  permitted  to  keep  its  books  in  any  other  form 
than  the  one  officially  prescribed.  This  standard  was  adopted 
after  extended  conference  with  the  Association  of  American 
Railway  Accounting  Officers,  which  body  has,  in  fact,  officially 
approved  of  the  form  adopted  in  most  regards.  These  accounts, 
therefore,  may  be  said  to  represent  the  combined  intelligence 
of  the  practical  and  theoretical  analysts,  of  the  operating  and 
financial  staffs,  and  of  the  governmental  supervisory  board. 
A  great  impetus  to  scientific  railroad  economics  has  undoubt- 
edly resulted  from  this  co-operation  between  government 
officials  and  private  managements. 

The  primary  distinction  in  railroad  expenses  is  between 
those  which  are  constant  and  independent  of  the  volume  of 
traffic,  and  those  which  vary  more  or  less  directly  in  propor- 
tion to  it.  Thus,  of  the  total  outlay,  it  may  at  once  be  pre- 
mised that  for  a  time,  at  least,  certain  capital  expenditures  are 
entirely  unrelated  to  the  volume  of  business  transported.  In- 
terest on  bonded  indebtedness  is  neither  increased  nor  dimin- 
ished, up  to  a  certain  point,  by  the  number  of  tons  of  freight 
moved;  whereas,  on  the  other  hand,  other  items  of  expendi- 
ture, such  as  wages  of  train  hands  and  fuel  cost,  are  more  or 
less  directly  affected.  The  distinction  above  mentioned  finds 
its  clearest  expression  in  the  primary  division  of  railroad 
accounts  into  so-called  "operating  expenses,"  which  are  varia- 
ble; and  "fixed  charges,"  which,  as  the  name  imphes,  are  con- 
stant. Much  of  the  direct  wear  and  tear  of  equipment  belongs 
to  the  first  class,  while,  as  we  have  said,  interest  on  its  own 
funded  or  floating  debt,  together  with  capital  obligations  on 
leased  lines,  naturally  fall  into  the  second  group.  This  second 
class  of  constant  expenses,  which  along  with  taxes  is  often 
1  Quarterly  Journal  of  Economics,  XXII,  1908,  p.  364  et.  seq. 


46  RAILROADS 

denominated  in  railway  reports  "Deductions  from  Income," 
is  a  relatively  large  one.  Thus,  in  1910,  out  of  a  total  expen- 
diture by  all  the  operating  railroads  of  the  United  States  of 
$1,822,000,000,  no  less  than  $490,000,000,  or  about  27  per  cent., 
consisted  of  interest  on  debt  and  taxes.  This  proportion  of 
absolutely  fixed  expenditures,  moreover,  shows  a  remarkable 
constancy  throughout  a  series  of  years.  It  reached  high- 
water  mark  during  the  hard  times  in  1895,  at  33.07  per  cent, 
of  all  outlay.  Indebtedness  had  accumulated  unduly,  while 
at  the  same  time  the  volume  of  traffic  was  so  small  that  mere 
operating  expenses  dwindled  in  proportion.  But  since  that 
time,  largely  as  a  result  of  the  financial  reorganizations  of 
1893-1897,  the  percentage  of  fixed  charges  has  reached  its 
present  low  point.  This  improvement  is  also  in  part  due  to  the 
growth  of  traffic,  and  thereby  of  operating  expenses.  The  latter 
have  indeed  grown  faster  than  the  accumulation  of  debt,  owing 
to  the  practice  prevalent  among  American  roads  of  pa>dng  for 
many  improvements  and  additions  out  of  surplus  income, 
rather  than  by  charging  them  to  capital  account,  —  that  is  to 
say,  by  borrowing  money  to  pay  for  them. 

Having  at  the  outset  deducted  approximately  one-quarter 
of  our  total  expenditures  to  meet  fixed  charges,  we  may  now 
proceed  to  analyze  those  outlays  which  remain.  And  this  is 
to  be  done,  always  keeping  in  mind  the  fundamental  distinc- 
tion between  constant  and  variable  items.  From  1887  until 
1906  the  operating  expenses  of  American  railroads  were  allo- 
cated in  the  four  following  groups: 

(1)  Maintenance  of  Way  and  Structures 

(2)  Maintenance  of  Equipment 

(3)  Conducting  Transportation 

(4)  General  Expenses 

This  grouping  under  the  new  law  of  1906  has  been  some- 
what re-distributed.  But  inasmuch  as  most  of  the  statistical 
data  as  yet  available  is  presented  under  the  above-named  heads, 
we  shall  adhere  to  that  classification.     This  we  may  the  more 


THEORY  OF  RAILROAD  RATES  47 

properly  do,  as  our  object  is  to  show  the  general  bearing  of 
railroad  expenditures  upon  rate  making,  rather  than  specifically 
to  analyze  cost  accounts.  For  this  simple  purpose  the  above 
arrangement  is  entirely  adequate. 

The  general  nature  of  each  of  these  above  named  groups  is 
roughly  expressed  by  its  title.  Under  the  first,  Maintenance 
of  Way,  are  segregated  those  outlays  which  have  to  do  with 
the  up-keep  of  the  roadway  and  permanent  structures  in  proper 
shape  for  the  moving  of  trains.  It  includes,  besides  such 
obvious  items  as  ballast,  rails,  ties  and  the  wages  of  track 
men,  every  outlay  on  permanent  structures,  such  as  bridges 
and  tunnels,  stations,  grain  elevators,  stock  pens,  gas,  oil  and 
water  tanks,  and  even  scrap  bins  and  eating  houses.  To 
these  are  added  scores  of  other  minor  items,  such  as  maintenance 
of  telegraph  lines,  fences  and  cattle  guards,  signal  plants  and 
docks  and  wharves.  Every  kind  of  tool  or  appliance  used, 
and  all  wages  paid  in  connection  with  the  maintenance  of  this 
part  of  the  property  are  included.  Insurance  and  even  the 
legal  costs  and  damages  mcurred  in  connection  with  accidents, 
are  all  assigned  to  the  appropriate  property.  The  second  group, 
Maintenance  of  Equipment  expenses,  includes,  as  the  name 
implies,  the  proper  care  and  preservation  of  ah  the  rolling  stock 
in  good  working  order.  Repairs  and  renewals  of  all  locomo- 
tives, cars  and  vessels,  form  the  largest  single  items.  But  all 
shop  machinery  and  power  plants  are  included,  with  specifica- 
tion in  detail  of  every  appliance  needed  in  connection  with 
the  work,  as,  for  example,  over  one  hundred  and  fifty  possible 
items  from  "adze  handles,  ammonia  and  auger  bits"  down  to 
"wire  brushes,  wrenches  and  zincs."  Conducting  Transporta- 
tion expenses,  the  third  group,  are  supposed  to  provide  for  the 
actual  movement  of  traffic.  The  two  former  classes  of  expen- 
diture having  put  the  fixed  plant  and  rolling  stock  in  condi- 
tion, it  remains  to  operate  the  property.  Under  this  head  is 
chargeable  all  costs  of  coal  and  supplies,  wages  of  train  hands 
from  enginemen  to  car  porters,  yard,  station,  switch  and  sig- 


48  RAILROADS 

nalmen  and  telegraph  operators.  To  these  are  added  such 
items  as  "purchased  power,"  '  cleaning  cars,"  "clearing 
wrecks,"  and  "  losses  and  damages  " ;  in  short,  every  conceivable 
item  of  expenditure  which  can  be  assigned  to  the  service  as 
distinct  from  the  mere  property. 

A  fourth  group  of  expenditures  remains,  denominated  Gen- 
eral Expenses.  This  includes  all  salaries  of  principal  admin- 
istrative officers  from  the  president  or  receiver  down  to  the 
real  estate  and  tax  agents,  together  with  all  their  allowances 
for  expenses,  special  cars  or  trains  and  the  like.  All  clerical 
salaries  in  the  general  offices  naturally  belong  here,  as  well 
as  most  of  the  legal  expenses,  outlay  for  pensions,  relief  depart- 
ments and  the  like. 

A  distinct  improvement  in  the  matter  of  principle  has  been 
made  in  the  revised  classification  of  operating  expenses  under 
the  new  law  of  1906,  by  the  segregation  of  a  fifth  group,  denom- 
inated Traffic  Expenses.^  These  cover  all  the  work  of  solicit- 
ing business,  making  rates  and  accounting  for  freight  and 
passenger  traffic.  Such  outlays  were  formerly  grouped  in  the 
main  under  conducting  transportation,  but,  as  is  quite  evident, 
they  are  distinct  in  their  nature  from  the  expenses  incidental 
to  the  actual  handling  of  trains.  Administrative  railroad 
organization  has  long  recognized  the  peculiar  and  important 
nature  of  this  work  by  constituting  it  a  separate  department, 
usually  headed  by  one  of  the  vice-presidents  of  the  road.  The 
main  items  under  this  special  head  are  salaries  and  expenses 
of  a  large  staff  of  officers  and  clerks,  such  as  general  passenger 
and  freight  managers,  agents  and  travelling  solicitors;  rents 
and  care  of  offices  at  home  or  abroad;  advertising,  membership 
in  traffic  associations,  immigration  and  industrial  bureaus, 
expenses  for  experimental  farms,  field  demonstrators,  donations 
to  expositions,  fairs  and  stock  shows  —  everything,  in  brief, 

^  U.  S.  Statistics  of  Railways,  190S,  p.  165  (and  annually  thereafter), 
gives  an  outline  of  these  expense  accounts  for  all  railways  over  five  hundred 
miles  long. 


THEORY  OF   RAILROAD  RATES 


49 


which  tends  to  create  or  keep  business,  to  be  afterward  actually 
handled  by  the  transportation  departments.  In  future  the 
detailed  official  statistics  will  segregate  these  expenses;  but  at 
the  present  writing  and  in  statistics  doA\Ti  to  1906  they  must 
be  bulked  in  with  conducting  transportation.  An  important 
modification  in  accounting  under  the  new  law  of  1906  has  also 
been  made  in  respect  to  depreciation  charges.  Heretofore 
the  practice  of  companies  varied  widely,  as  will  hereafter  be 
shown.  Under  the  new  rulings  a  definite  and  uniform  system 
of  charging  off  for  depreciation  has  to  be  provided,  the  details 
of  which,  however,  need  not  concern  us  at  this  time.^ 

The  following  table  based  upon  the  returns  for  1905  shows 
the  relative  importance  of  the  principal  items  under  railroad 
expenditures  grouped  under  the  proper  headings: 


Per  cent,  of 
operating 
expenses 

Per  cent,  of 

total 
expenditures 

Maintenance  of  way  and  structures    .  . 

Repairs  of  roadway    

Renewals  of  rails    .  .        

10.39 
1.3 
2.66 
2.32 
2.11 

S.29 
1.97 
8.20 

9.4 
11.28 
6.54 
4.34 
6.44 

19.78 

20.76 
55.49 

3.96 
100 

14.39 

Renewals  of  ties 

Repairs,  etc.,  of  bridges,  etc 

Repairs,  etc.,  of  buildings,  etc 

Maintenance  of  equipment 

15  09 

Repairs  &  renewals  of  locomotives   . 
Repairs  &  renewals  passenger  cars    . 
Repairs  &  renewals  freight  cars  .... 

Conducting  transportation   

Engine  and  roundhouse  men    

Fuel  for  locomotives    

40.36 

Train  service  (wages) 

Switchmen,  flagmen,  etc 

Station  service    

General  expenses    

2  90 

Total  operating  expenses  .... 
Fixed  charges    

27.23 

Total  —  all  expenditures  .... 

100 

1  Treated  in  vol.  II,  chap.  XV. 
1909,  p.  76. 

VOL.  I 4 


Begins  in  U.  S.  Statistics  of  Railways, 


50 


RAILROADS 


DISPOSITION  OF  REVENUES  AND  INCOME  FOR  THE   FISCAL  YEAR    ENDING  JUNE  30, 
1909.      (OPERATING  ROADS) 


'^U32J9J   P3jpun/^  aUQ 


ages,  not  of  the  operating  expenses 
outgo,  including  capital  expenditures 
charges.     It  should  also  be  noted,  of 


In  the  first  two 
columns  the  per- 
§  centages  given  re- 
I  late  to  the  operating 
of  expenditures  alone, 
g     without     reference 

LU 

X  to    the    total    ex- 

c5  penses  —  eluninat- 

^  ing,  that  is  to  say, 

^  the  large  group  of 

u.  fixed  charges,    and 

o 

z  treating  these  oper- 

o  .                       . 

H  ating  costs  entirely 

E     by  themselves  as  if 

5     the  others  were  non- 

%  •   existent.       In    the 
< 

^     third  or  right-hand 

UJ 

g     column,   it  will  be 

111 

^     observed,  the  main 

groups     are    again 
given    in    percent- 
alone,  but  of  the  total 
in  the   nature  of  fixed 
course,  that  only  a  few 


THEORY  OF   RAILROAD  RATES  51 

of  the  large  or  more  important  items  are  here  included,  and 
in  the  right-hand  colunm  no  details,  other  than  for  the  four 
main  headings,  have  been  computed.  The  constancy  in  the 
distribution  of  these  groups  of  railroad  expenditures  over  a 
term  of  years  is  graphically  shown  by  the  opposite  diagrams.^ 
The  perpendicular  line  for  each  year  is  divided  proportionately 
to  the  relative  importance  of  each  designated  item  of  expense 
for  that  year.  Thus  the  course  of  the  horizontal  lines,  dividing 
the  four  main  percentage  zones,  represents  the  ups  and  downs 
in  the  relative  importance  of  each  item.  Occasionally,  as  in 
the  years  following  1895,  the  proportion  of  so-called  general 
expenses  decreased  appreciably;  but,  in  the  main,  all  the  items 
moved  more  or  less  in  unison  subject  to  the  movements  of  wages 
and  prices.  This  relative  constancy  proves  how  fundamental 
the  arrangement  of  groups  is. 

The  attempt  to  differentiate  the  constant  from  the  variable 
expenses  of  railroads  on  the  basis  of  the  foregoing  operating 
statistics  may  now  be  made.  What  proportion  of  each  item 
in  the  table  for  each  of  the  large  groups  is  fixed  in  amount; 
and  what  proportion  fluctuates  more  or  less  in  connection  with 
the  volume  of  traffic? 

Under  the  first  category,  Maintenance  of  Way  and  Struc- 
tures, absorbing  about  one-fifth  of  operating  expenses,  over 
one-half  is  incurred  for  so-called  "repairs  of  roadway."  It  is 
evident  that  a  large  part  of  this  expense  is  due  not  to  wear 
but  to  weather.  A  costly  plant  is  exposed  to  every  vicissitude 
of  flood,  fire,  and  waste.  Reballasting  and  reahgnment  may  be 
somewhat  more  expensive  where  traffic  is  heavy;  but  certainly 
all  general  repairs,  the  wages  of  track  walkers,  the  removal 
of  snow,  ice,  and  weeds,  must  be  attended  to  entirely  irrespec- 
tive of  the  number  or  size  of  passing  trauis.  Of  the  second 
item,  renewals  of  rails,  it  is  probable  that  this  expenditure  is 
directly  traceable  to  wear  and  tear  in  large  part.     The  more 

1  Changes  in  accounting  rules  in  1907  prevent  its  continuation  to  date; 
but  the  data  for  1909  under  the  new  system  are  reproduced  alongside. 


52  RAILROADS 

trains,  the  heavier  the  locomotive  and  ears  or  the  higher  the 
speed,  the  more  rapidly  must  these  rails  be  replaced.  But 
even  so,  the  proportionate  amount  is  small,  constituting  gen- 
erally between  five  and  ten  per  cent,  only  of  the  group  expendi- 
ture for  maintenance  of  way.  With  ties,  an  item  about  twice 
as  important  as  rails,  the  case  is  exactly  the  reverse.  Ties  rot 
out  rather  than  wear  out.  They  have  a  natural  life  varying 
from  four  to  fourteen  years,  as  influenced  by  climate,  ballast, 
and  drainage.  The  necessary  expenditure  per  mile  for  them 
by  different  roads  varies  greatly,  as  might  be  expected;  but 
it  seems  to  bear  little  relation  to  the  density  of  traffic.  As  for 
the  principal  remaining  items  under  Maintenance  of  Way, 
such  as  repairs  of  bridges  and  buildings ;  if  properly  designed  to 
withstand  their  loads  and  strains,  most  expenses  of  their  up- 
keep such  as  repainting  and  reroofing  should  be  practically 
independent  of  the  volume  of  business.  A  recent  elaborate 
discussion  of  these  matters  in  1907  in  the  Wisconsin  Two-Cent 
Fare  decision,  reached  the  conclusion  that  all  of  the  cost  of 
rails,  one-third  of  the  ties  and  ten  per  cent,  of  expenditures 
for  roadway,  track  and  bridges,  are  all  that  can  properly  be 
charged  to  wear  from  traffic,  as  opposed  to  natural  depreciation. 
Acworth  illustrates  this  point  by  comparison  of  the  Midland 
&  Great  Western  Railway  of  Ireland  and  the  Lancashire  & 
Yorkshire  Railroad.  These  two  are  of  about  equal  length, 
approximately  530  miles.  The  latter  carries  forty  times  the 
traffic  of  the  former  road,  and  yet  its  expenses  for  maintenance 
of  way  are  only  eight  times  as  much.  It  seems  safe,  in  general, 
to  conclude  that  in  this  first  large  group  of  expenditures  for 
maintenance  of  the  fixed  plant,  probably  not  over  one-third 
are  variable  to  any  considerable  degree.  Acworth  for  England 
estimates  this  proportion  at  about  two-fifths. 

The  proportion  of  variable  expenditures  for  Maintenance  of 
Equipment — the  second  group  —  is  probably  higher  than  in 
that  of  maintenance  of  way.  This  is  due  to  two  causes.  Rolling 
stock  is,  of  course,  subjected  more  directly  to  wear  and  tear 


THEORY  OF  RAILROAD  RATES  53 

in  service  than  are  bridges,  cuts  and  fills  and  buildings.  Roll- 
ing stock,  moreover,  is  susceptible  to  change  of  type  and  im- 
provement. Its  effective  life  is  thus  shortened  both  by  use 
and  by  replacement.  Before  being  worn  out  it  may  have  be- 
come antiquated.  More  powerful  locomotives  and  larger  cars 
suited  to  new  requirements  of  the  business  may  necessitate 
scrapping  otherwise  good  equipment.  This  very  fact,  how- 
ever, imposes  upon  the  management  the  need  of  intensive 
service  while  it  lasts.  All  the  mileage  possible  must  be  ex- 
tracted from  each  vehicle  before  it  goes  out  of  date,  and  this 
imphes  a  higher  proportion  of  wear-out  than  of  mere  rust-out. 
Yet  the  fact  is  still  true  that  many  of  the  items  in  this  class 
are  unaffected  by  the  mileage  or  tonnage  performance.  There 
is  little  difference  in  wear  on  a  freight  car  as  between  light 
and  moderately  heavy  loads;  and  as  for  passenger  cars,  the 
actual  wear  assignable  to  the  paymg  load  is  a  negligible  quan- 
tity. We  may,  at  all  events,  risk  an  estimate  in  the  statement 
that  probably  not  over  half  of  all  the  expenditures  of  a  rail- 
road for  maintenance  of  equipment  vary  with  the  volume  of 
the   business. 

The  direct  efifect  of  a  changing  volume  of  business  is  most 
clearly  seen  in  the  third  group  of  operating  expenses,  havmg 
to  do  with  Conducting  Transportation.  This  is  very  important, 
comprising  as  shown  by  the  table  on  page  49,  no  less  than 
fifty-five  per  cent,  of  operatmg  outlay  and  forty  per  cent,  of 
total  expenditures  including  fixed  charges.  At  first  glance  it 
would  appear  as  if,  at  last,  one  had  here  to  do  with  a  direct 
relativity  between  cost  and  volume  of  business.  Surely  the 
cost  of  fuel  for  motive  power  will  vary  with  the  tonnage  moved  I 
This  item,  amounting  in  1905  to  no  less  than  $156,000,000  for 
the  railroads  of  the  United  States,  was  the  largest  in  the  budget, 
constituting  eleven  per  cent,  of  all  operating  expenses.  Yet 
brief  consideration  shows  that  even  here  much  of  this  expense 
is  constant  and  invariable.  A  locomotive  will  bum  fully  one- 
third  as  much  coal  merely  to  move  its  own  weight  as  to  haul 


54  RAILROADS 

a  loaded  train.  Five  to  ten  per  cent,  of  its  total  daily  eon- 
sumption  is  required  merely  for  firing  up  to  the  steaming  point. 
Twenty-five  to  fifty  pounds  of  coal  per  hour  go  to  waste  in 
holding  steam  pressure  while  a  freight  train  is  waiting  on  a 
siding.  Every  stop  of  a  train  going  thirty  miles  per  hour 
dissipates  energy  enough  to  have  carried  it  two  miles  along  a 
level  road.  In  brief,  expert  evidence  shows  that  of  this  im- 
portant expenditure  for  coal,  from  thirty  to  fifty  per  cent,  is 
entirely  independent  of  the  number  of  cars  or  the  amount  of 
freight  hauled.  The  largest  wage  items  in  this  group  of  con- 
ducting transportation  expenses  are  for  engine  and  round- 
house men,  and  conductors  and  brakemen.  This  expense  is, 
of  course,  even  more  independent  of  the  volume  of  business 
than  the  cost  of  coal.  No  more  engine  men  or  conductors  are 
needed  for  a  heavy  through  express  or  freight  train  than  for 
a  single  car  train  on  a  branch  line.  And  the  extra  cost  for 
service  of  more  brakemen  as  the  size  of  the  train  increases, 
is  relatively  unimportant  when  modern  equipment  with  air 
brakes  is  used.  Appreciation  of  this  fact  is  largely  respon- 
sible for  the  great  increase  in  train  loads  in  recent  years.  Train- 
mile  costs  can  be  economized  most  effectively  by  distributing 
the  wages  of  a  train  crew  over  as  large  a  tonnage  as  possible 
of  paying  freight.  As  for  the  wages  of  station  men,  switch 
and  flag  men,  they  are  largely,  and  often  entirely,  independent 
of  the  amount  of  business.  From  all  these  considerations,  it 
appears  that  at  a  conservative  estimate,  no  less  than  fifty  per 
cent,  of  the  cost  of  conducting  transportation  constitutes  a 
fixed  charge  upon  the  property  once  it  is  in  operation,  irrespec- 
tive of  the  volume  of  business  transacted. 

The  group  of  general  expenses,  which  alone  remains  for 
analysis,  is  relatively  small  in  amount.  It  is  obvious  that  these 
outlays  are  a  constant  burden  but  slightly  influenced  by  the 
variation  in  traffic.  Salaries  may  indeed  be  reduced  somewhat 
during  hard  times  —  a  few  clerks  may  be  laid  off;  but,  on  the 
other  hand,  this  being  an  expense  of  organization,  the  general 


THEORY  OF  RAILROAD  RATES 


55 


staff   must   be   maintained   at   about  a   certain   standard   of 
efficiency  regardless  of  business. 

Summarizing  our  estimates  thus  far,  we  may  recon- 
struct a  table,  distributing  expenditures  theoretically  according 
as  they  are  constant  or  variable  in  somewhat  the  following 
way: 


Per  cent,  of 
operating  expenses 

Per  cent,  of 
total  expenses 

Both 

Con- 
stant 

Vari- 
able 

Both 

Con- 
stant 

Vari- 
able 

Maintenance  of  way 

Maintenance  of  equipment.  . 
Conducting  transportation  .  . 
General  expenses 

20 

20 

56 

4 

13.4 
10 

28 
4 

6.6 
10 

28 

15 
15 
40 
3 

27 

10 

7.5 
20 

3 

27 

5 

7.5 
20 

Fixed  charges 

100 

55.4 

44.6 

100 

67.5 

32.5 

Thus  one  arrives  at  the  general  conclusion  that  approximately 
two-thirds  of  the  total  expenditure  of  a  railroad  and  more  than 
one-half  of  the  actual  operating  expenses  are  independent  of 
the  volume  of  traffic.  The  remaining  third  of  all  expenditures, 
or  what  amounts  to  the  same  thing,  the  other  half  of  the  operat- 
ing expenses,  are  immediately  responsive  to  any  variation  in 
business.  Applied  to  the  railroad  net  of  the  United  States, 
this  means  that  only  about  one-third  of  the  $2,000,000,000 
disbursed  in  19&5  —  an  amount  equal  to  about  two  and  one- 
half  times  the  national  debt  —  was  susceptible  of  variation 
according  as  the  traffic  expanded  or  decreased.  This  provisional 
estimate,  defective  principally  because  of  inadequacy  of  the 
returns  as  to  depreciation  and  replacement,  agrees  in  the  main 
with  computations  based  upon  other  data.  The  Vice-Presi- 
dent of  the  Southern  Pacific  Railroad,  in  1892,  after  extended 


56  RAILROADS 

investigation,  arrived  at  precisely  the  same  general  conclusion. 
The  great  German  authority,  Sax,  estimates  that  one-half  of 
a  road's  operating  outlay  is  constant  and  that  this  operating 
outgo  equals  about  half  the  total  expenditure,  the  other  half 
bemg  capital  cost  and  hence  constant.  This  calculation  places 
the  constant  factors  even  higher  than  ours,  viz.,  at  about  three- 
fourths  of  the  total  expenditure.  Eaton  states  that  half  of  the 
operating  expenses  respond  to  changes  in  the  volume  of  traffic. 
Our  estimate,  above  detailed,  seems  to  be  in  accord  therefore 
with  good  authority,  and  differs  but  little  from  any  of  the 
reliable  writers. 

It  should  be  observed  in  passing  that  the  relative  distribu- 
tion of  outgo  above  mentioned,  varies  greatly  both  as  between 
different  railroads  and,  on  the  same  road,  as  between  different 
years.  1  Duruig  lean  seasons  the  imperative  need  of  reducing 
expenses  generally  induces  the  heaviest  inroads  on  expenditure 
for  maintenance  of  way.  Nearly  one-third  of  these  expendi- 
tures can  probably  be  postponed  for  short  periods  without 
serious  detriment  to  operation;  but,  of  course,  there  is  for  each 
property  an  irreducible  minimum  at  which  economy  must 
halt.  On  the  other  hand,  the  cost  of  moving  each  train,  that 
is  to  say,  the  outlay  for  fuel  and  wages,  cannot  be  greatly  cut, 
although  some  discontinuance  of  freight  trains  may  take  place. 
The  most  readily  postponable  outlay  is  therefore  found  in  the 
department  of  maintenance  of  way.  Two  hundred  ties  per 
mile  may  be  annually  renewed  instead  of  twice  that  number 
for  a  year  or  two.  Heavy  decreases  in  the  wage  account  for 
road  and  track  men  may  be  effected,  sometimes  at  the  cost  of 
public  safety  perhaps,  but  none  the  less  effectively  from  an 
immediate  fiscal  point  of  \aew.  A  series  of  hard  years  thus 
always  results  in  heavy  proportional  curtailments  of  main- 
tenance of  way  expenses.  In  1895,  for  instance,  midway  be- 
tween the  two  worst  years  of  the  depression  of  1893-1897, 

I  U.  S.  Statistics  of  Railways,  1908,  p.  165,  and  annually  thereafter 
gives  data  for  all  large  roads. 


THEORY  OF  RAILROAD  RATES 


57 


only  19.82  per  cent,  of  operating  expenses  was  devoted  to 
maintenance  of  way,  with  15.76  per  cent,  expended  for  main- 
tenance of  equipment.^  Six  years  later,  in  the  full  tide  of 
prosperity,  the  outlay  for  maintenance  of  way  had  risen  to 
22.27  per  cent.  With  over  350,000  freight  cars  idle  on  sidings, 
as  during  the  spring  of  1908,  expenditures  on  repairs  of  equip- 
ment may  temporarily  be  postponed.  Depreciation  rather 
than  wear  takes  place.  An  economy  of  about  five  per  cent. 
may  temporarily  be  effected  in  this  wise.  It  is  only  with  the 
return  of  prosperity  that  the  temporary  postponement  of  this 
expenditure  makes  itself  felt.  Economy  at  the  expense  of 
efficiency  is  poor  business  policy  in  the  long  run.  With  the 
revival  of  activity  on  the  other  hand,  as  in  1898,  there  may  be 
witnessed  a  sudden  concentration  of  the  postponed  expendi- 
tures of  the  preceding  years.  The  Illinois  Central  was  spend- 
ing $1,400  per  mile  on  maintenance  of  way  in  1905,  as  against 
only  $1,150  in  1897.  A  succession  of  fruitful  years  may,  how- 
ever, find  the  property  so  thoroughly  kept  up  that  some  measure 
of  relaxation  in  expenditures  may  ensue.  During  these  good 
years  with  heavy  traffic,  it  is  the  maintenance  of  equipment 
charges  which  tend  to  rise.  Locomotives  and  cars  are  con- 
stantly in  need  of  repair  owing  to  hard  usage.  This  was  a 
noticeable  feature  during  the  four  years  after  1900.  The 
Illinois  Central,  expending  only  $866  per  mile  for  maintenance 

iThe  sharp  decline  in  traffic  in  1911,  especially  after  the  suspended 
advance  of  rates,  as  affecting  maintenance  expenditures  per  mile  of  road, 
is  shown  as  follows : 


1911 

1910 

$5931 
3296 
2375 
8681 
2451 
9088 

$6336 

3363 

2653 

8087 

3413 

9792 

Multiplying  these  differences  into  thousands  of  miles  of  line  shows  the 
great  economy  resulting. 


58  RAILROADS 

of  equipment  in  1897,  laid  out  $2,200  per  mile  for  the  same 
purpose  in   1907. 

Sometimes,  as  in  January,  1903,  or  November,  1906,  general 
wage  increases  all  along  the  line  take  place.  These,  of  course, 
affect  all  branches  of  the  service.  Supplies  of  all  kinds  may 
also  enhance  in  price.  It  was  doubtless  the  rise  in  the  price 
of  coal  which  increased  the  proportionate  importance  of  the 
fuel  item  in  the  railroad  budget  of  the  United  States  from  9.8 
per  cent,  in  1900  to  11.8  per  cent,  in  1904.  The  tremendous 
rise  in  expenses  of  all  kinds  in  1907  was  not  at  first  appreciated 
because  of  the  large  volume  of  traffic.  It  was  only  when  the 
sharp  decline  in  business  following  the  panic  in  October  of  that 
year  took  place,  that  the  full  influence  of  this  factor  became 
apparent. 

As  between  different  roads  also,  the  relative  proportion  of 
the  various  elements  of  cost  will  vary  according  to  circum- 
stances. Northern  lines  are  exposed  to  heavy  maintenance 
of  way  charges,  owing  to  snow,  ice,  and  frost.  In  rugged  dis- 
tricts or  with  heavy  grades,  expensive  operation  is  apparent  in 
high  conducting  transportation  expenses.  On  the  Pennsyl- 
vania trunk  fine,  rising  to  2,100  ft.  above  sea  level  and  with 
many  curves,  the  distribution  of  expenditures  is  quite  different 
from  that  on  the  New  York  Central,  which  operates  a  straighter 
fine  at  about  water  grade.  On  the  Union  Pacific,  movement 
expenses  have  been  at  times  over  fifty  per  cent,  higher  than 
on  the  St.  Paul  road,  which  operates  in  level  country.  It  is  a 
combination  of  high  grades  and  poor  equipment,  which  un- 
doubtedly keeps  the  relative  cost  of  conducting  transportation 
so  high  on  the  Erie.  The  proportion  of  local  to  through  busi- 
ness is  of  importance  in  this  connection.^  Railroads  like  the 
Boston  &  Maine  or  the  St.  Paul  system  before  1908,  because 
they  have  so  much  local  business,  contrast  strongly  with  others 
like  the  Chicago  Great  Wcetern,  the  Erie  or  the  old  Fitchburg 
Railroad.  On  the  latter  roads  the  distribution  of  expenses  is 
1  Cf.  pp.  259  and  422,  injra. 


THEORY  OF  RAILROAD  RATES  59 

different,  because  their  large  volume  of  through  traffic  carried 
in  bulk  is  so  much  cheaper  to  handle.  Obviously,  the  expense 
incident  to  frequent  stops  and  loss  of  time,  as  well  as  in  loading 
and  unloading  local  business,  will  be  much  greater  than  in 
long  haul  trainload  traffic.  The  cost  of  large  items  hke  fuel 
will  vary  greatly  in  different  parts  of  the  country  from  perhaps 
SI. 25  per  ton  for  coal  in  Pennsylvania  up  to  $7  or  more  on  the 
Pacific  coast.  Since  the  recent  discoveries  of  petroleum  in 
Texas  and  California,  economies  have  been  effected  upon  the 
Southern  Pacific,  which  by  comparison  with  Northern  Pacific, 
still  using  coal,  may  be  of  great  importance.  More  than  six- 
tenths  of  the  cost  of  locomotive  service  is  for  fuel,  so  that  a 
reduction  of  cost  from  §4  a  ton  to  an  oil  equivalent  at  $1  per 
ton  may  aggregate  a  large  sum.  It  has  been  estimated  that 
such  a  saving  on  1,600,000  tons  of  coal  would  pay  five  per  cent, 
on  an  additional  capital  of  §100,000,000.  Similarly  the  char- 
acter of  the  freight,  whether  it  be  like  coal,  iron  ore  or  grain, 
cheaply  handled,  or  merchandise  which  must  be  carefully 
housed  and  treated;  its  regularity,  whether  it  flows  evenly 
the  year  round  like  the  dressed  beef  business,  or  as  on  the  cotton 
and  cattle  range  roads,  is  concentrated  in  a  short  season  and 
all  moves  in  one  direction;  ^  the  relative  proportions  of  freight 
and  passenger  business  —  in  New  England  about  on  an  equality, 
while  m  the  West  and  South  nearly  nine-tenths  freight;  and, 
finally,  the  efficiency  of  management,  in  the  use  of  rolling  stock, 
making  up  trainloads  and  keeping  all  equipment  busy;  all  of 
these  factors  will  influence  the  proportionate  distribution  of 
expenditures.  The  operation  of  each  road  thus  constitutes 
an  interesting  problem  in  statistical  analysis  by  itself.^ 

1  The  provision  of  plant  and  equipment  to  carry  the  "peak  of  the  load" 
is  often  a  serious  handicap. 

2  For  an  instance  of  detailed  analysis  of  cost,  the  general  investigation 
of  soft  coal  rates  to  the  lakes  in  1912  is  highly  suggestive.  Two-thirds  of 
revenue  went  for  operation  and  maintenance,  one-third  for  return  upon 
plant.  This  was  the  first  attempt  to  justify  an  advance  in  rates  for  a 
large  volume  of  traffic  on  the  ground  that  it  did  not  contribute  its  pro- 
portionate share  of  earnings.     22  I.C.C.Rep.,  604. 


60 


RAILROADS 


The  relation  of  course  between  density  of  traffic  and  the 
distribution  of  expenditures  is  direct.  Heavy  and  frequent 
trains  increase  the  wear  and  tear  as  distinct  from  mere  depre- 
ciation from  age  and  weather.  This  is  demonstrated  graphi- 
cally by  the  following  diagram.^     The  solid  black  horizontal 

mATm  orr/fArr/c  to  mwrrm/yct  ormr 

COSTS  ON  T?TTmmTAT/^£  rTI5TT/fN  A/\/D  mTl/fN 
/fOADS  -/9/0 


fiOllA^S 


/ooo  roAf  /^/irj 


mA/r//i/MC£  or  mr  MD  smcrmrs  r/^  mo  /^ry/Nur 
FM  mrs. 


belts  to  right  of  the  centre  show  how  low  is  the  density  of 
traffic  on  the  five  upper  western  roads  by  contrast  with  the 
five  carriers  in  trunk  line  territory.  The  left  hand  horizontal 
belts  show  proportionally  in  dollars  the  outlay  per  mile  of 
road  for  maintenance.  Naturally  the  expense  of  such  main- 
tenance is  likewise  less  on  the  western  lines.  But  when  stated, 
not  absolutely  in  dollars  per  mile  of  road  but  in  terms  of  utiliza- 
tion, as  by  the  shaded  belts  to  right  of  the  centre,  the  true  state 

1  From  Railroad  Operating  Costs;  by  Suffcrn  &  Co.,  New  York,  1911. 


THEORY  OF  RAILROAD  RATES  61 

of  things  appears.  Density  considered,  in  other  words,  the 
western  roads  are  all  as  well  kept  up  as  those  in  the  East.  The 
necessity  at  all  times  of  interpreting  such  expenditures,  not  in 
absolute  figures  but  in  terms  of  utilization,  is  obvious;  and  yet 
it  is  not  always  done  in  practice. 

Up  to  this  point  it  has  appeared  as  if,  in  making  distinction 
between  the  constant  and  variable  expenditures  of  a  railroad, 
it  was  the  latter  only  which  grew  as  the  volume  of  traffic  in- 
creased. This  is  not  absolutely,  but  only  relatively  true, 
not  only  of  the  so-called  constant  operating  expenses,  but  of 
fixed  charges  as  well.^  Everything  depends  upon  the  length 
of  time  under  consideration.  Many  expenses  follow  the  fluc- 
tuations of  business,  not  evenly  but  by  jerks.  Up  to  the  full 
limit  of  utilization  of  the  existing  plant,  each  increment  of 
traffic  seems  to  necessitate  but  a  very  small  increase  in  the 
so-called  variable  expenses,  with  hardly  any  change  at  all  in 
the  constant  ones.  A  branch  road  can  haul  more  and  more 
tons  of  freight  with  a  given  outfit  of  cars  and  locomotives  by 
merely  increasing  slightly  its  outlay  for  fuel,  train  service, 
wages  and  supplies.  But  after  a  certain  point  more  rolling 
stock  must  be  provided  to  accommodate  the  growing  business. 
As  each  of  these  additions  to  property  occur,  they  contribute 
new  quotas  to  the  fixed  charges  and  to  the  so-called  constant 
expenses  of  operation,  such  as  maintenance  of  roadway  and 
the  like.  Nor  can  these  new  expenses  be  allocated  to  the  new 
business  alone.  The  moment  the  old  traffic  has  outgrown  the 
existing  plant,  the  new  expenditure  becomes  chargeable  to  all 
the  business  alike.  The  new  outgo  must  be  distributed  evenly 
over  the  entire  volume  of  traffic  thereafter  handled.  Each 
ton,  both  of  old  and  of  new  traffic,  beyond  the  haulage  capacity 
of  the  locomotives  then  in  service,  is  equally  responsible  for 
the  expense  of  new  equipment  purchased.  Although  the  old 
business  could  have  been  handled  without  a  milhon  dollars 

1  Lorenz  in  Quarterly  Journal  of  Economics,  XXI,  pp.  283-292,  is  sug- 
gestive. 


62  RAILROADS 

spent  for  double-tracking  or  terminal  enlargement,  this  addi- 
tion to  the  expense  of  maintenance  of  way  or  to  the  fixed  charges 
is  equally  attributable  to  every  ton  of  traffic  hauled. 

A  concrete  example  may  aid  in  making  this  important 
principle  clear.  The  new  through-freight  trunk  line  built  by 
the  Pennsylvania  Railroad  since  1900,  paralleling  its  old  four- 
track  one,  represents  both  in  the  cost  of  maintenance  and 
capital  charges,  a  sudden  jump  in  the  expense  of  transporting 
each  ton  of  freight  on  both  lines,  until  such  time  as  the  new 
business  grows  to  a  point  where  it  can  support  the  new  line  by 
itself  alone.  The  relation  between  increasing  returns  and 
density  of  traffic  is  well  illustrated  in  this  instance.  With 
six  tracks  in  operation  nearly  all  the  way  from  Pittsburg  to 
Philadelphia,  the  four  old  tracks  are  sometimes  almost  fully 
utilized  for  passengers  and  fast  freight.  The  extraordinarj^ 
density  of  traffic  appears  in  the  statement  that  this  road  in 
1911  on  3534  miles  of  track  handled  one-third  more  ton  miles 
than  the  Union  Pacific  —  by  far  the  most  worked  of  all  the 
western  lines  —  handled  on  13,674  miles  of  track.  The  two 
new  low-grade  Pennsylvania  freight  tracks  are  used  only  for 
slow  traffic ;  largely  coal  and  west-bound  steel  empties.  Not- 
withstanding the  extraordinary  density  of  traffic  on  this  extra 
two  track  line,  it  probably  does  not  meet  the  fixed  charges 
on  cost  of  construction  of  the  line.  Yet  the  new  double  track 
was  absolutely  necessary,  regardless  of  its  profitableness,  in 
order  to  relieve  congestion  on  the  old  four  tracks.  In  other 
words,  the  demands  of  the  service  forced  an  expenditure  which 
in  and  of  itself  was  not  financially  self-supporting.  But  the 
profit  from  the  old  lines  would  be  sufficiently  enhanced  to  take 
care  of  the  whole.  The  bearing  of  such  cases  upon  the  capital 
needs  of  the  future  is  obvious.  A  resolutely  conservative  policy 
of  finance  becomes  imperative  under  such   circumstances. 

In  much  the  same  way,  the  general  condition  of  congestion 
reached  in  1903-'05  on  the  eastern  trunk  lines  and  in  the 
West  and  South  in  1906-'07,  manifested  mainly  in  the  need 


THEORY  OF  RAILROAD   RATES  63 

for  more  tracks  and  terminals,  represented  the  permanent 
outgrowth  of  the  old  plant;  and  necessitated  a  readjustment 
of  capital  expenses'  for  the  purpose  of  enlargement.  Viewed 
in  a  large  way  over  a  term  of  years,  nearly  every  expenditure, 
even  the  fixed  charges  which  appear  constant  or  independent 
of  the  volume  of  business,  thus  become  in  reality  imbued  with 
more  or  less  variability. 

The  preceding  considerations  hold  good  not  alone  of  in- 
creased facilities,  but  of  their  curtailment  as  well.  This  point 
is  often  neglected  in  respect  of  capital  outlay,  which  once  made 
cannot  be  recalled.  Rotting  of  ties  we  have  held  to  be  a  con- 
stant expense  of  operation.  It  goes  on  steadily,  whether 
traffic  conditions  be  good  or  bad.  But,  on  the  other  hand,  those 
ties,  if  they  be  under  a  third  or  fourth  track,  would  never  have 
been  laid  had  not  there  been  a  promise  of  business  sufficient 
to  render  the  added  investment  profitable.  As  Lorenz  ob- 
serves, "the  question  is  not.  What  expenditures  would  dis- 
appear if  a  certain  proportion  of  the  traffic  should  be  discon- 
tinued? but  ^Miat  expenditure  would  not  now  be  incurred  if 
that  traffic  had  never  been  called  forth?"  Viewed  in  this  way, 
even  the  necessary  replacement  of  ties  under  a  (temporarily) 
little  used  extra  track,  is  an  expense  determined  at  some  time, 
even  if  not  always,  by  the  volume  of  the  business.  In  the  long 
run,  therefore,  the  percentage  of  total  cost  which  we  may  assign 
to  an  increase  in  the  volume  of  traffic,  is  higher  than  appears 
from  a  cross-section  of  expenses,  taken,  as  was  at  first  had,  in  a 
given  year.  Lorenz  has  illustrated  this  steady  expansion  of  all 
groups  of  expenditure  in  relation  to  expansion  of  traffic  by  the 
folloAdng  table,  in  which  the  actual  figures  for  each  year 
[brought  down  to  date]  are  replaced  by  an  index  number 
based  upon  100  for  the  year  1895.  It  would  have  been  highly 
suggestive  to  continue  all  of  this  data  alike  to  the  present  time; 
but,  as  noted  on  the  table,  certain  items  have  been  so  modi- 
fied by  changes  m  accounting  practice,  that  this  could  not  be 
done. 


64 


RAILROADS 


a 
•a  S3 

§2 

'b 

a 
o 
H 

1 

1 

■1 
°  2 

o  " 

>>  <- 

-Si 

CI  -a 

'o 

i  s 
si 

"S  3 

CI 

CI   fcc 

c3" 

g 

'a 
6 

1895 

100 

100 

100 

100 

100 

100 

100 

100 

1896 

107 

111.8 

107 

106 

111.2 

117.9 

103.1 

99.4 

1897 

104 

111.6 

100.5 

103 

108.5 

100.4 

99.8 

98.4 

1898 

116 

133.8 

109.7 

113 

120.4 

124.9 

109.1 

101.1 

1899 

122 

145.1 

119.7 

118 

126.8 

134.6 

115.6 

110.0 

1900 

138 

166.1 

131.5 

132 

150.4 

164.2 

126.9 

112.7 

1901 

147 

172.5 

142.3 

142 

164.6 

173.2 

135.5 

121.8 

1902 

100 

184.5 

161.5 

154 

185.2 

200.2 

151.7 

131.4 

1903 

170 

203.2 

171.6 

173 

198.6 

225.6 

174.7 

142.1 

1904 

184 

204 

179.8 

184 

194.8 

250.7 

188.6 

153.5 

1905 

193 

219 

195 

191 

191 

253 

179 

154 

1908 

216 

254 

206.5 

212 

216 

288.8 

194 

106 

1907 

240 

277 

227 

241 

1 

1 

1 

1 

1908 

222 

256 

238 

230 

— 

— 

— 

1909 

224 

256 

238 

220 

— 

— 

— 

— 

1910 

256 

300 

265 

251 

— 

— 

— 

— 

According  to  this  showing,  maintenance  of  equipment,  which 
we  held  in  our  analysis  to  be  about  one-half  a  constant  expense 
and  independent  of  traffic,  especially  after  1900,  appears  to 
have  actually  outrun  the  expansion  of  ton-mileage  and  pas- 
senger business.  How  largely  this  is  due  to  actual  purchases 
for  the  sake  of  future  growth  is  not  determinable.  And  main- 
tenance of  way  outlay  —  one  of  our  largely  constant  expenses 
—  has  increased,  in  fact,  more  rapidly  than  conducting  trans- 
portation, which  we  held  to  be  mainly  variable.  But  these 
figures  are  confused  by  the  failure  to  differentiate  in  the  ac- 
counts, mere  maintenance  from  actual  improvements  and 
additions  to  plant.  Expenditures  for  these  latter  purposes, 
charged  to  operating  expenses  rather  than  to  capital  account, 
have  been  so  enormous  during  these  years  of  prosperity  that 
they  confuse  the  true  facts  utterly.     It  is  to  be  hoped  that  now 

1  Change    of    accounting    methods    vitiates    further    comparisons    of 
operating  costs  after  1907. 


THEORY    OF    RAILROAD    RATES  65 

with  the  revised  statistics  since  1906,  which  will  permit  a 
clearer  definition  of  these  exjDenditures  in  detail,  an  analysis 
covering  a  series  of  years  will  bring  out  the  real  relationships. 
Equally  important  is  the  fact  that  these  years  have  been  char- 
acterized by  rapid  and  extensive  rises,  both  of  prices  and  wages. 
Had  our  table  covered  a  longer  series  of  years  the  results  would 
have  been  more  clear.  Until  such  an  analysis  be  made,  it  will 
suffice  for  our  purpose,  viz.,  the  analysis  of  the  principles  of 
railroad  rate  making,  that  we  adhere  to  our  first  general  con- 
clusion, namely  —  that  of  the  total  expenditures  of  a  railroad 
at  any  given  time  about  two-thirds  of  them  are  constant,  while 
only  one-third  vary  with  the  ups  and  downs  of  the  volume  of 
traffic.  Comprehending  in  survey  a  long  period  of  years,  it 
might  happen,  as  Acworth  concludes,  that  nearly  one-half  of 
the  total  expenditures  were  entirely  fixed  in  character,  leaving 
the  other  half  as  dependent  upon  the  amount  of  transportation 
effected. 

The  manner  in  which  heavy  capital  outlay  for  maintenance 
accompanies  as  well  as  partly  accounts  for  a  decline  in  the  cost 
of  conducting  transportation  on  American  roads,  is  graphically 
shown  by  the  diagram  on  the  next  page.^  During  ten  years 
a  steady  decline  in  direct  operating  costs  has  accompanied  an 
equally  marked  upward  tendency  in  expense  of  maintenance. 
The  bearing  of  this  on  the  problem  of  rate  advances  in  future 
is  direct.  Profitableness  results  from  two  separate  sources; 
economical  operation  such  as  longer  trains  and  better  loading, 
and  also  from  far  heavier  capital  investment  in  plant,  by  which 
such  operation  is  rendered  possible.^  Both  alike,  however, 
attend  upon  increased  volume  of  business.  Heavy  capital  in- 
vestment may  lessen  immediate  maintenance  charges,  —  lower 
grades  and  straighter  alignment  naturally  wearing  less;  but, 
on  the  other  hand,  the   burden   of   interest   and   other  fixed 

1  From  Railroad  Operating  Costs,  by  Suffern  &  Co.,  New  York,  1911. 
^Cf.   Yale   Review,    1910,  pp.  268-288;    with   reference  to    the   rate 
advances  of  that  year. 
VOL.  I — 5 


66 


RAILROADS 


expenses  steadily  grows.  How  will  they  stand  toward  one 
another  by  1925  on  the  eastern  trunk  lines?  Will  growth  of 
business  bring  lower  rates  or  not?  A  fine  field  for  further 
analysis   is   as   yet   unworked. 

RATIO  OF minTEnAtic£  OF  pRopmrr  AfiD  conoucnm 
TRA/yspoRmr/o/i  ro  rom  oPFRATfm  apFnsc. 


COMDUCrifIG    TRfinSPORr/lTIO/Y. 


One  final  relation  between  operating  and  fixed  expenses  is  left 
for  consideration.  It  is  so  well  put  by  J.  Shirley  Eaton  in  an 
unpublished  paper,  that  it  can  best  be  stated  in  his  own  words : 

"It  is  impossible  to  have  an  absolute  and  universal  line  of  demarca- 
tion between  the  direct  and  the  fixed  expense,  that  shall  be  the  same 
on  all  roads.  One  road  chooses  to  reduce  a  grade  and  thereby  increase 
the  capital  account  in  order  to  save  in  the  current  expense  of  a  helper 
at  a  hill  or  the  lost  margin  of  efficiency  of  the  loaded  train  on  the  level. 


THEORY    OF    RAILROAD    RATES  67 

The  relation  between  a  current  expense  and  the  annual  charge  of 
the  capitalized  cost  on  a  fixed  plant  that  performed  the  same 
serv'ice,  was  well  illustrated  in  a  case  arbitrated  by  Mr.  Blanchard 
in  New  Orleans.  One  road  which  did  not  have  access  to  the  heart 
of  the  city  undertook  to  compensate  its  disadvantage  by  trucking  to 
and  from  its  depot.  The  hire  of  a  pubUc  truckman  to  perform  the 
service  for  its  patrons  was  very  soon  commuted  to  the  practice  of  pay- 
ing the  amount  of  the  truck  expense  to  the  consignee  by  deducting 
it  from  the  freight  bill  rendered,  the  consignee  or  shipper  performing 
the  service.  This,  kno\Mi  as  'drayage  equaUzation,'  was  claimed  by 
competitors  to  be  in  the  nature  of  a  rebate  to  secure  business.  The 
arbitrator  decided  that  the  first  roads  had  elected  to  buy  their  right 
of  way  into  the  heart  of  the  city;  and  the  road  that  had  not  built  into 
the  city  elected  to  pay  the  expense  of  the  same  ser\dce  in  the  shape  of 
a  current  drayage  bill  instead  of  in  the  shape  of  interest  on  money 
invested  in  right  of  way.  Therefore  he  decided  there  was  no  cause  for 
complamt."  ^ 

Railroad  expenditures,  as  Taussig  clearly  pointed  out  a 
number  of  years  ago,^  afford  a  prime  illustration  of  the  pro- 
duction of  several  commodities  by  a  single  great  plant  simul- 
taneously at  joint  and  indistinguishable  cost.  The  classic 
economists  illustrated  this  law  by  the  joint  production  of  wool 
and  mutton  and  of  gas  and  coke.  In  both  of  these  instances 
neither  commodity  could  conceivably  be  produced  alone.  Nor 
was  either  one,  so  to  speak,  a  by-product  of  the  other.  So 
nearly  of  equal  importance  are  the  two,  in  fact,  that  the  cost 
of  production  for  each  may  approximately  be  determined  by 
dividing  the  total  cost  according  to  the  relative  worths  of  the 
two  or  more  products.  The  law  of  joint  cost  with  reference 
to  the  production  of  transportation  is  somewhat  different. 
Compare,  for  instance,  the  carriage  by  a  railroad  of  thousands 
of  passengers  and  different  commodities  in  every  direction, 
under  varying  conditions,  singly  or  by  wholesale,  slowly  or 
by  express,  over  a  given  set  of  rails  every  day;  with  the  opera- 
tion of  a  great  refinery  producing  simultaneously  kerosene, 
gasoline,  lubricating  oils  and  greases  as  well  as  various  odd 

1  Cf.  the  Free  Cartage  case,  167  U.S.,  633. 

2  Quarterly  Journal  oj  Economics,  V,  1891,  pp.  438^65. 


68  RAILROADS 

chemicals.  Both  are  examples  of  production  at  joint  cost, 
but  with  various  important  contrasts.  In  the  refinery  all  the 
costs  are  joint.  All  the  processes  are  interlocked.  Every 
increase  in  the  output  of  kerosene  produces  pari  passu  an 
increase  of  the  other  commodities.  On  the  railroad  not  all, 
but  only  a  part  of  the  costs  are  joint,  in  such  manner  as  has 
been  shown.  For,  from  the  joint  portion  of  its  plant  —  roadway 
rails  and  locomotives  —  the  railroad  may  produce  transportation 
of  different  sorts  quite  independently.  It  may  choose  to  espe- 
cially cultivate  its  passenger  traffic,  or  its  cotton  or  coal  busi- 
ness. After  a  certain  point  of  congestion  is  reached,  the  various 
sorts  of  traffic  on  the  railroad  may  even  become  actually  com- 
petitive with  one  another  so  far  as  the  joint  use  of  the  plant 
is  concerned.  It  is  plain  that  this  could  never  happen  in  the 
refinery.  The  use  of  more  stills  for  making  kerosene  would 
automatically  produce  more  by-products  of  every  sort.  But 
on  a  railroad  it  might  well  happen  that  the  coal  and  passenger 
business  might  come  to  interfere  with  one  another.  A  choice 
of  emphasis  as  between  fast  refrigerator  beef  or  fruit  traffic, 
and  limited  express  service,  may  have  to  be  made  on  a  long 
single  track  line.  Nevertheless,  in  spite  of  these  peculiarities 
of  transportation,  the  general  law  of  joint  costs  holds  good, 
in  that  it  is  a  demand  for  each  service  rather  than  its  cost  which 
finally  determines  the  chargeable  rate.^  This  must  be  so, 
because  of  the  fact  that  the  cost  of  each  shipment  is  so  largely 
joint  and  indeterminate,  and  that  a  large  part  of  the  entire 
plant  is  indistinguishably  devoted  to  the  general  production 
of  transportation  without  reference  to  particular  units  of  busi- 
ness. One  concrete  example  may  serve  to  illustrate  this  point. 
For  years  attempts  have  been  unsuccessfully  made  by  ac- 
countants to  effect  the  primary  separation  between  expenses 
of  passenger  and  freight  business,^  in  order  to  determine  the 

.1  Two  important  qualifications  of  this  law,  however,  are  set  forth  at 
p.  265,  infra. 

2  Cf.  our  Railway  Problems,  rev.  ed.,  circa  pp.  684,  706. 


THEORY    OF    RAILROAD    RATES  C9 

cost  of  transportation  per  unit  in  each  case.  Some  companies 
like  the  Louisville  &  Nashville  and  the  Burlington  system, 
still  divide  up  the  two,  usually  on  the  basis  of  the  engine  mileage 
lor  each  class  of  traffic.  This  may  be  serviceable  enough  for 
comparisons  of  costs  from  year  to  year  hi  the  same  company, 
but  it  has  no  general  value  and  it  may,  moreover,  become  highly 
misleading.  The  most  absurd  conclusions  may  result.  Thus 
at  one  time  it  appeared  from  such  data,  compiled  by  the  Inter- 
state Commerce  Commission,  that  the  New  York  Central, 
with  five  times  the  density  of  traffic  of  the  Illinois  Central, 
was  actually  conducting  its  freight  busmess  at  a  much  higher 
cost  per  ton  mile.  Such  inconsistencies  induced  the  Interstate 
Commerce  Commission  in  1894  to  abandon  the  attempt  at  any 
such  primary  separation  of  accounts.^  It  has  since  been  reat- 
tempted,  in  special  cases,  as  by  the  Wisconsin  Railroad  Com- 
mission in  its  notable  "Two-cent  Fare"  decision  ui  1907,  the 
division  being  made  according  to  a  number  of  different  criteria.^ 
But  it  is  plaui  that  a  very  large  proportion  —  probably 
over  half  —  of  the  expenditures  for  freight  and  passenger  busi- 
ness are  entirely  joint,  however  distuict  the  revenues  from  each 
service  may  be.  We  have  seen  that  approximately  two-thirds 
of  the  outgo  is  incurred  on  behalf  of  the  property  as  a  whole. 
Certain  expenses,  to  be  sure,  such  as  train  wages,  coal  con- 
sumption and  the  maintenance  of  rolling  stock,  are  readily 
divisible;  but  with  respect  to  the  maintenance  of  way  and 
structures  —  about  forty  per  cent,  of  the  total  outgo — all  guides 
fail.  Even  in  respect  of  the  cost  of  rails,  due  to  wear  and 
tear  of  train  movement,  we  are  quite  at  sea  in  the  allocation 
of  expenses.  Freight  trains  may  indeed  be  four  times  as 
heavy  as  passenger  trauis;  but,  on  the  other  hand,  they  move 
at  far  slower  speeds.     And  then,  finally,  how  about  the  large 

1  The  first  successful  attempt,  as  to  soft  coal  rates  to  the  lakes,  is  in 
22  I.C.C.  Rep.,  613.     Cf.  13  Idem,  423. 

2  Wisconsin  Railroad  Commission  Report,  1907,  p.  101.  Compare  also 
Woodlock,  p.  91;  U.  S.  Statistics  of  Railways,  1894,  p.  70;  Yale  Review, 
1908,  p.  382;  and  Record,  Cincinnati  Freight  Bureau  Case,  II,  p.  941. 


70  RAILROADS 

item  of  capital  cost,  the  proportion  of  outgo  for  fixed  charges? 
This  equals  about  twenty-seven  per  cent,  of  the  total  expendi- 
tures for  the  United  States  as  a  whole.  We  may,  of  course, 
divide  these  expenses  arbitrarily  on  the  basis  of  the  relative 
gross  revenue  from  freight  and  passenger  business  respectively. 
And  yet  how  absurd  it  would  be  to  attempt  to  allocate  an  ex- 
pense of  a  million  dollars  for  the  abolition  of  grade  crossings  in 
this  way.  As  between  the  New  Haven  road,  with  passenger 
and  freight  revenues  about  equal,  and  a  western  road  with  only 
one-tenth  of  its  income  derived  from  passengers,  the  apparent 
cost  of  freight  business  on  the  eastern  road  would  be  absurdly 
reduced  by  any  such  process.  The  facts  are  plain.  So  many 
expenditures  are  incurred  indiscriminately  on  behalf  of  the 
service  as  a  whole  —  being  an  indispensable  condition  for  opera- 
tion of  the  property  at  all  —  that  no  logical  distinction  of 
expense  even  as  between  passenger  and  freight  traffic  is  possible. 
This  being  so,  how  futile  it  is  to  expect  to  be  able  to  set  off  the 
expenses  due  to  any  particular  portion  either  of  freight  or  pas- 
senger service,  and  especially  to  any  individual  shipment.  It 
may  oftentimes  be  possible  to  determine  the  extra  cost  due  to 
individual  shipments.  This,  of  course,  mainly  applies  to  what 
are  called  movement  expenses.  Thus  the  haulage  cost  of  a 
2,000-ton  grain  train  from  Chicago  to  New  York  has  been  esti- 
mated at  $520.  But  how  small  a  part  this  is  of  the  total  cost, 
the  preceding  analysis  must  have  made  clear.  In  the  Texas 
Cattle  Raisers'  case,  detailed  analysis  of  the  extra  cost  for  the 
traffic  in  cattle  was  presented.^  The  starting  point  in  this 
attempt  was  necessarily  an  allocation  of  freight  and  passenger 
expenditures,  which,  if  defective,  would  vitiate  the  entire  subse- 
quent calculation  as  to  costs.  In  this  instance,  it  was  the 
judgment  of  the  Interstate  Commerce  Commission  in  its  final 
decision  in  1908,  that  no  such  separation  of  expenditures  was 
possible  as  a  basis  for  the  determination  of  cost  of  service. 

1 13  I.C.C.  Rep.,  423.     Compare  9  Idem,  423;  and  Yale  Review,  1908, 
p.  287. 


CHAPTER    III 
THE   THEORY   OF   RAILROAD   RATES  (Cont'd) 

The  law  of  increasing  returns,  71.  — Applied  to  declining  traffic,  73.— 
Illustrated  by  the  panic  of  1907,  75.  —  Peculiarly  intensified  on  rail- 
roads, 76. 

Growth  of  mileage  and  traffic  in  the  United  States  since  1889,  77.  —  In- 
crease of  earnings,  79.  — Operating  expenses,  gross  and  net  income, 
80.  —  Comparison  with   earlier  decades,  85.  —  Density  of  traffic,  86, 

—  Increase   of   train   loads,  88.  — Limitations   upon   their    economy, 
92. —Heavier  rails,  93.  — Larger  locomotives,  94.  — Bigger  cars,  95. 

—  Net  result  of  improvements  upon  efficiency  and  earning  power, 
97. 

The  law  of  increasing  returns  due  to  financial  rather  than  operating 
factors,  99. 

A  railroad  theoretically  presents  a  clear  example  of  an  in- 
dustry subject  to  the  law  of  increasing  returns  —  that  is  to 
say,  an  industry  in  which  the  cost  of  operation  grows  less 
rapidly  than  the  volume  of  business  done.  Each  ton  of  freight 
added  to  the  existing  traffic  costs  relatively  less  to  haul.  From 
this  it  follows,  obviously,  that  the  net  returns  increase  more 
than  proportionately  with  the  expansion  of  traffic.  This  may 
be  demonstrated  by  a  simple  calculation.  It  has  already  been 
shown  that  only  about  two-thirds  of  the  total  expenditures 
of  a  railroad  are  applied  to  operation,  the  remaining  third 
being  devoted  to  capital  account.  Moreover,  of  these  two- 
thirds  of  the  total  applied  to  operating  outlay,  only  about 
one-half  responds  to  any  change  in  the  tonnage,  the  other  half 
being  constant  up  to  a  certain  point.  Otherwise  expressed, 
an  increase  of  one  per  cent,  in  traffic  and,  therefore,  of  revenue, 
produces  an  increase  in  expense  of  only  one-half  of  two-thirds 
of  one  per  cent.^     Two-thirds  of  the  entire  increment  of  revenue 

1  Illustrated  by  the  seasonal  variation  of  business.     Vide  appendix  to 
this  chapter  at  p.  100. 


72  RAILROADS 

goes  to  projQt.  Carry  this  increase  further  and  the  effect  is 
more  striking.  Suppose  traffic  to  grow  tenfold.  The  former 
outlay  being  $100  for  a  given  volume  of  business,  would  be 
divided  according  to  our  rule  as  follows:  one-third  for  fixed 
charges,  one-third  for  constant  operating  outlay  and  one-third 
for  variable  expenses.  With  ten  times  as  much  traffic,  only 
the  last  group  of  outgoes  will  expand.  One  thousand  dollars 
revenue  would  therefore  become  available  under  the  new 
conditions,  to  pay  the  same  fixed  charges  as  well  as  constant 
operating  costs.  The  total  outgo  would  thus  become  $33  plus 
$33  plus  $330,  or  $396  in  all.  Almost  two-thirds  of  the  incre- 
ment of  revenue  still  remains  as  profit.  It  might  well  happen 
that  such  an  expansion  could  not  ensue  without  large  increases 
in  the  capital  and  plant,  as  has  already  been  noted;  but  up  to 
that  point  this  calculation  would  hold  good.  The  following 
statement  varying  but  slightly  from  our  foregoing  assump- 
tions, illustrates  the  principle.^  Let  the  distribution  of  expendi- 
tures for  given  conditions,  producing  $100  of  revenue,  be  these, 
viz.: 

Operating  expenses    $  67 

Fixed  charges $  28  . 

$  95 
Profits  for  dividends $     5 


Now  assume  an  increase  of  ten  per  cent,  in  the  traffic  and 
consequently  in  the  revenue;  but  assume  also  that  the  average 
extra  cost  per  unit,  of  the  new  business,  is  only  forty  per  cent, 
as  much  as  for  the  preexisting  tonnage.  Were  the  added  cost 
of  each  ton  mile  as  great  as  before,  the  operating  expenses 
would  rise  by  the  full  ten  per  cent,  of  $67.  But  on  Webb's 
assumption,  they  will  rise  by  only  forty  per  cent,  of  ten  per 
cent.     The  new  account  would  then  stand  thus: 

•  Webb,  Economics  of  Railway  Construction;    originally  in  Welling- 
ton's Economic  Theory  of  the  Location  of  Railways. 


THEORY  OF   RAILROAD   RATES  73 

Operating  expenses  ($67  plus  forty  per  cent,  of 

ten  per  cent,  of  $67)       $  69.68 

Fixed  charges  as  before      $  28.00 

$  97.68 
Income,  increased  by  ten  per  cent     $110.00 

Balance  for  profit  or  dividends     $  12.32 

By  an  increase  of  ten  per  cent,  in  tonnage,  balance  for  dividends 
has  more  than  doubled. 

In  this  connection  it  will  be  noted  that  a  constant  rate  of 
return  per  unit  of  business  newly  acquired  has  been  assumed. 
Attempts  were  made  on  behalf  of  the  railroads,  during  the 
long  period  of  decline  of  ton  mile  revenue  down  to  1900,  by 
Newcomb  and  others,  to  show  that  this  is  an  unreasonable 
assumption;  in  that  increased  traffic  is  presumably  to  be  had 
only  by  a  progressive  lowering  of  the  rates  charged.  This 
contention  has  been  effectively  demolished  by  the  steady  and 
remarkable  growth  of  traffic  since  1900,  even  in  the  face  of  a 
substantial  rise  of  rates  all  along  the  line.  A  necessary  corollary 
to  our  proposition,  beside  that  of  the  maintenance  of  a  constant 
scale  of  charges,  is,  of  course,  also  of  the  continuance  of  a  given 
grade  of  service  and  of  costs  of  operation.  If  more  luxuriously 
appointed  passenger  trains  or  quicker  freight  service  have  to 
be  given  in  order  to  produce  the  growth  of  business,  the  added 
costs  of  operation  must,  naturally,  be  taken  into  consideration. 
If  widespread  rise  of  wages  follows  an  increase  in  the  general 
cost  of  living,  that  too  is  an  entirely  extraneous  factor.  But 
with  a  given  grade  of  service,  constant  rates  and  steady  wage 
scales,  there  can  be  no  question,  up  to  the  point  of  full  utiliza- 
tion of  the  existing  plant,  that  the  operation  of  railroads  affords 
clear  demonstration  of  the  law  of  increasing  returns. 

The  obverse  side  of  the  law  of  increasing  returns  is  also  of 
great  importance.  For  the  same  reason  that  when  traffic  in- 
creases, only  a  portion  of  the  expenses  are  affected,  it  follows 
that,  when  business  declines,  only  a  part  of  the  costs  can  be 
lopped  off.  In  other  words,  a  reduction  in  the  volume  of  traffic 
does  not  in  itself  alone  lead  to  a  corresponding  reduction  in 


74  RAILROADS 

the  operating  expenses.  Of  course,  many  of  these  latter  may, 
as  we  have  seen,  be  temporarily  postponed,  as  they  were  in 
1893-1897,  especially  in  the  group  of  maintenance-of-way 
expenses.  In  such  an  event  they  must  ultimately  be  made 
good  by  extraordinary  outlay  at  some  later  time.  But,  unless 
they  be  thus  postponed  and  unless  the  rates  charged  for  service 
be  reduced  in  order  to  stimulate  traffic,  it  is  inevitable  that  the 
margin  of  profit  will  drop  as  rapidly  as  it  tends  to  rise  with 
increased  volume  of  business.  This  may  be  illustrated  by  the 
following  computation.^  Assume  the  total  revenue  from  a 
given  business  to  be  $100,  and  assume  it  to  be  distributed  as 
before,  viz.: 

Operating  expenses    $67 

Fixed  charges    $  28 

$"95 

Leaving  profit $     5 

Total    $100 

A  positive  decline  of  ten  per  cent,  in  the  tonnage,  if  the  cost 
for  operation  per  unit  of  the  portion  lost  was  the  same  as  the 
rest,  would  obviously  reduce  the  operating  expenses  also  by  ten 
per  cent.  Let  it  next  be  assumed,  as  was  done  previously,  that 
the  average  extra  cost  per  unit  of  the  latest  increment  of  busi- 
ness was  only  forty  per  cent,  as  much  as  for  the  remainder  of 
the  tonnage.  How  closely  this  will  approximate  the  facts  in 
any  particular  mstance  will  depend  upon  the  density  of  traffic 
attained  in  relation  to  the  capacity  of  the  existing  plant.  If 
the  addition  of  the  last  ten  per  cent,  of  business  did  not  in- 
crease the  large  proportion  of  fixed  expenses  at  all,  and  only 
added  forty  per  cent,  per  unit  more  to  the  variable  expenses; 
per  contra,  the  loss  of  it  would  merely  reduce  the  variable  ex- 
penses and  still  leave  the  constant  outlay  the  same.  On  this 
assumption,  by  the  loss  of  ten  per  cent,  of  business  the  total 
amount  of  operating  expenses  under  the  new  conditions  would 
1  Webb,  op.  cit;  originally  from  Wellington. 


THEORY  OF   RAILROAD   RATES 


75 


be  lessened,  not  by  ten  per  cent,  of  $67,  but  by  only  forty  per 
cent,  of  ten  per  cent,  of  $67.  The  income  would,  however, 
decline  by  the  full  amount  of  ten  per  cent.  The  account,  after 
a  loss  of  ten  per  cent,  of  business,  would  then  stand  somewhat 
as  follows: 

Operating  expenses  ($67  less  fory  per  cent,  of 

ten  per  cent,  of  $67)     $64.32 

Fixed  charges,  as  before   $28.00 

$92.32 

Income,  reduced  by  ten  per  cent $90.00 

Leaving  a  deficit  of      $2.32 

Or,  in  other  words,  a  decline  of  ten  per  cent,  in  tonnage  has 
transmuted  a  five  per  cent,  dividend  condition  into  one  involv- 
ing an  actual  deficit  nearly  half  as  great  as  the  former  profit. 
The  sudden  reversal  from  apparent  prosperity  to  very  real 
distress,  such  as  occurred  during  the  fall  of  1907,  is  thus  ex- 
plained. Its  suddenness  may  be  shown  by  the  following  table 
of  monthly  gross  and  net  earnings,  promulgated  by  the  Inter- 
state Commerce  Commission.'  The  acute  panic  occurred 
during  October,  but  its  effect  was  not  apparent  until  the  follow- 
ing month.  The  total  mileage  included  is  shown  by  the  first 
column: 


Mileage 

Earnings 
. per  mile 

Gross 

Net 

1907 
1907 
1907 
1907 
1907 
1907 
1908 

July   

August 

September 

October 

November 

December 

January  

223,900 
224,100 
224,300 
224,700 
224,800 
224,400 
198,700 

$1,022 

$1,079 
$1,045 
$1,116 

$981 
.$861 
$746 

$304 
$345 
$314 
$337 
$261 
$197 
$148 

1  Wall  Street  Journal,  March  25,  1908. 


76  RAILROADS 

This  table  shows  that  whereas  under  full  prosperity,  up  to  and 
including  the  month  of  October,  the  net  revenue  was  about 
thirty  per  cent,  of  gross;  after  the  sharp  decline  in  traffic,  it 
dropped  in  November  to  twenty-six  per  cent.,  and  progress- 
ively thereafter  to  twenty  per  cent,  in  January.  In  other 
words,  a  decline  of  about  one-fourth  in  the  gross  revenue  within 
four  months,  entailed  a  loss  of  over  fifty  per  cent,  in  net  earn- 
ings. Higher  operating  expenses  in  the  winter  may  have  ex- 
aggerated this  tendency,  but,  on  the  other  hand,  drastic 
economies  were  put  into  effect,  which  would  more  than  offset 
the  difference. 

The  urgent  need  of  at  once  meeting  any  loss  of  business  by 
prompt  reduction  of  operating  expenses  is  apparent.  But  there 
is  comfort  to  be  found  at  this  point  in  the  fact  that  each  one 
per  cent,  saved  in  operation  at  any  given  time,  results  in  saving 
two  per  cent,  for  the  net  earnings.  According  to  our  estimates, 
and  as  a  rule  practically,  operating  expenses  equal  about  two- 
thirds  of  gross  revenue,  leaving  one-third  to  meet  charges  and 
pay  dividends.  Every  reduction  from  this  two-thirds  of  gross 
revenue,  therefore,  transferred  to  the  balance,  increases  the 
latter  proportionately  twice  as  much.  This  fact  in  turn  ex- 
plains the  urgent  pressure  always  brought  to  bear  at  such 
times  to  effect  economies  all  along  the  line.  These  are  too 
often  indiscriminately  made.^  Such  paring  down  of  expenses 
should  always  be  made  with  an  eye  to  their  ultimate  effect 
upon  the  operating  efficiency  of  the  property  in  the  long  run. 
To  postpone  much-needed  repairs  of  equipment  during  a  period 
of  depression,  like  that  of  1907-1908,  when  repair  shop  costs 
are  at  a  low  ebb,  only  to  hamper  operations  and  to  effect  repairs 
under  pressure  when  business  revives,  is  an  instance  of  such 
wasteful  economy. 

The  qualification  of  the  law  of  increasing  returns  as  applied 
to  railroads,  arising  from  the  distinction  between  long  and 
short  term  production  of  its  commodity  —  transportation  — 
^  Eaton,  Railroad  Operations,  etc.,  pp.  44-58. 


THEORY  OF  RAILROAD   RATES  77 

as  above  described,  is  of  course  by  no  means  confined  to  car- 
riers alone.  It  holds  good  of  a  factory  or  mercantile  establish- 
ment as  well.  But  in  the  case  of  railways,  it  is  emphasized  by 
the  abruptness  with  which  the  condition  of  congestion  of  plant 
arises.  The  limit  of  full  working  capacity  in  a  factory  is  elastic, 
by  reason  of  the  fact  that  under  the  "peak  of  load"  —  in  busy 
seasons  —  it  may  prolong  operations  beyond  the  daylight  hours 
or,  at  worst,  work  all  night  by  double  shifts.  But  a  railroad, 
customarily  working  by  night  as  well  as  by  day  and  thus  dis- 
tributing its  operations  over  the  entire  twenty-four  hours, 
enjoys  no  such  expansible  limits  upon  utilization  of  its  plant. 
When  such  full  utilization  is  attained,  the  end  comes  suddenly. 
No  postponement  to  a  more  tavorable  time  for  raising  funds 
for  better  terminals  or  four  tracking  the  main  line  is  possible; 
nor  does  its  character  as  a  public  servant  permit  a  railroad  to 
curtail  service.  The  dead  wall  of  congestion  cannot  be  gotten 
around  by  either  path.  A  crisis  is  presented,  calling  for  the 
most  heroic  measures.  This,  of  course,  still  further  emphasizes 
the  need  for  a  long  look  ahead  into  the  future  with  respect  to 
railroad  finance;  not  for  the  management  alone,  but  for  the 
government  as  well,  charged  as  it  is  at  present  with  control 
over  rates  for  service. 

The  application  of  the  law  of  increasing  returns  to  railroads 
in  actual  practice  is  beset  with  difficulties.  In  order  to  make 
these  clear,  it  will  be  necessary  first  to  describe  the  phenom- 
enial  development  of  this  country  which  has  taken  place  during 
the  last  two  decades. 

The  freight  service  of  the  railroads  of  the  United  States, 
measured  by  weight,  in  1910,  amounted  to  1,026,000,000  tons. 
Only  since  1899  when  the  corresponding  figure  given  by  the 
Interstate  Commerce  Commission  was  501,000.000  tons,  have 
accurate  data  been  obtainable.  This  would  indicate  a  growth 
in  ten  years  of  about  one  hundred  per  cent.  But  this  figure 
takes  no  account  of  the  distance  each  ton  of  freight  travels. 


78 


RAILROADS 


This  factor  is  included  in  what  is  known  as  ton  mileage  — 
that  is  to  say,  the  equivalent  of  the  number  of  tons  of  freight 
carried  one  mile.  Obviously,  so  far  as  the  amount  of  service 
rendered  is  concerned,  one  ton  carried  a  hundred  miles  is  the 
equivalent  of  one  hundred  tons  transported  one  mile.  Every 
carrier  totalizes  in  this  way  each  ton  of  freight  movement  by 
multiplying  it  into  the  distance  transported.  For  the  United 
States  as  a  whole,  this  ton  mileage  in  1910  was  255,016,000,000 
—  that  is  to  say,  the  service  rendered  would  be  represented  by 
the  carriage  of  that  number  of  tons  one  mile.  The  appended 
diagram  shows  the  phenomenal  rapidity  with  which  this  trans- 
portation service  has  grown  since  1899.  The  scale  on  the 
left  hand  side  of  the  chart  serves  this  purpose.  The  right 
hand  scale  indicates  the  miles  of  line  in  operation. 


/"fc/aAw*  6ro>,n  'f  MiUa<j>.  and  Traffic 

The  rapid  growth  up  to  1893  was  suddenly  interrupted  •by 
panic  and  subsequent  industrial  depression  lasting  for  about 
four  years.  Recovery  began  in  1897,  since  which  time  the 
freight  movement  has  increased  by  leaps  and  bounds  from 


THEORY  OF  RAILROAD   RATES  79 

about  95,000,000,000  ton  miles  to  255,016,000,000  ton  miles  in 
1910.  It  is  obvious  that  the  growth  of  transportation  in  any 
country  is  bound  to  be  more  rapid  than  the  increase  either 
in  population  or  in  wealth.  It  appears,  indeed,  almost  as  if 
the  volume  of  transportation  in  the  United  States  increased 
more  nearly  as  the  square  of  population  than  in  direct  pro- 
portion. It  has  been  estimated  that  we  forward  two  and  a 
half  times  as  much  freight  per  ca-pita  as  some  of  the  leading 
European  countries  like  France.  Our  domestic  population 
from  1890  to  1910  increased  about  fifty  per  cent.  The  railroad 
mileage  grew  at  about  the  same  rate.  Yet  the  freight  service 
surpassed  this  rate  of  growth  more  than  six  times  over;  and  the 
passenger  service  augmented  nearly  as  much.  Both  alike  in 
1910  were  practically  three  times  as  great  in  volume  as  twenty 
years  before.  The  diagram  on  page  78  is  intended  to  illustrate 
the  relative  rapidity  of  this  development.  While  population 
and  mileage  increased  about  one  half,  the  railroads  in  1910 
hauled  the  equivalent  of  three  times  the  volume  of  freight  traffic 
handled  in  1890.  At  the  beginning  of  this  period,  the  railroads 
had  to  seek  the  freight.  Now  it  appears  that  traffic  normally 
will  seek  the  railroads.  At  times,  even,  as  in  1906-1907,  the 
railroads  have  actually  sought  to  escape  the  flood  of  business 
presented. 

The  magnitude  and  importance  of  the  growth  of  tonnage, 
as  above  described,  is  revealed  by  the  rapid  increase  in  rail- 
road earnings.  The  course  of  these  is  shown  by  the  succeed- 
ing chart  on  page  82.  Gross  revenues  of  American  railroads  in 
1889  were  about  one  billion  dollars.  In  1910  they  amounted 
to  82,750,000,000.  Thus  it  appears  that  gross  earnings 
almost  equalled  three  times  the  amount  of  twenty  years  ago. 
The  net  income  available  for  dividends  has  grown  even  faster. 
The  increase  was,  roughly  speaking,  about  five  fold;  namely, 
from  101  millions  in  1889  to  515  millions  in  1910.  Nearly 
three  and  one-half  times  as  much  money  went  annually  to  the 
owners  of  railroad  securities  as  dividends  and  interest,  besides 


80  RAILROADS 

leaving  surplus  earnings  for  1910  of  about  222  millions  available 
for  improvements  and  surplus.  But  the  limit  of  utilization 
seems  to  have  been  about  reached  on  many  roads  in  1906; 
and  an  era  of  extensive  new  capital  outlay  to  increase  the 
existing  plants  and  facilities  ensued.  Indications  are  not 
lacking  to  show  that  at  the  height  of  activity  before  the  indus- 
trial collapse  of  1907-1908,  such  a  point  of  saturation  had  been 
reached,  especially  in  trunk  line  territory  and  on  the  northern 
transcontinental  lines.^  On  the  Northern  Pacific,  for  instance, 
the  ton  mileage  increased  from  2.2  bilhons  to  5.2  billions  between 
1900  and  1906.  The  Northwest  was  suddenly  confronted  at 
that  time  with  the  new  issue  of  enlarging  facilities,  which  had 
been  slowly  becoming  apparent  elsewhere  in  the  country  during 
the  preceding  decade.  Grain  actually  rotted  on  the  ground, 
and  an  acute  coal  famine  occurred,  because  of  sheer  inability 
of  the  roads  to  care  for  the  new  traffic.  Changes  in  methods 
of  business  also  somewhat  exaggerated  this  strain  upon  the 
carriers.  Merchants  now  ex-pect  quick  delivery  to  order. 
They  object  to  stocking  up  months  ahead,  even  when  condi- 
tions are  auspicious;  therefore,  business,  when  especially  stim- 
ulated, comes  with  an  irresistible  rush.  All  these  causes, 
coupled  with  undiscriminating  attempts  by  inadequately 
bedded  roads  to  imitate  the  methods  of  progressive  ones  by 
prematurely  increasing  their  train  loads,  led  to  a  practical 
breakdown  of  the  transportation  business  of  the  country  in 
the  autumn  of  1906.  To  the  student  of  transportation,  this 
congestion  denoted  the  attainment  of  a  point  of  saturation  for 
the  then-existing  physical  plant.  The  analogy  to  the  case  of 
the  Pennsylvania  Railroad,  previously  described,  is  obvious. 
Such  a  predicament  is  bound  to  arise  in  the  development  of 
any  carrier  in  a  rapidly  growing  country.  Its  fiscal  significance 
will  appear  in  due  time. 

A  comparison  of  the  growth  of  business  and  of  operating 
expenses  for  the  entire  railroad  system  of  the  United  States 
1  Investigation  in  12th  Ann.  I.C.C.  Rep.,  561. 


THEORY  OF  RAILROAD   RATES 


81 


over  a  series  of  years  is  given  in  the  following  table.  The 
results  are  expressed  by  means  of  index  numbers  based  upon 
the  year  1880,  taken  as  100.^ 

Relative    Increase    in   Traffic   Items,    Operating    Expenses    and 
Revenue  From  1880  to  1906,  Inclusive 


1880 

Items 

1881 
to 

1885 

1886 

to 
1890 

1891 

to 

1895 

1896 

to 
1898 

1904 

to 

1906 

Ton  miles  of  freight   .  . 
Passenger  miles  of  pas- 
sengers    

100 

100 
100 

100 

134.36 

138.12 
132.75 

203.23 

189.46 
174.39 

264.90 

233.15 
215.30 

183.0 

313.81 

224.65 
221.42 

190.0 

595.0 
412.0 

Operating  expenses  .  .  . 

Gross      income      from 

operation   

394.0 
346.0 

From  this  table  it  appears  that  between  1880  and  1906  the 
ton  mileage  of  freight  increased  about  six  fold,  and  the  passen- 
ger business  more  than  four  fold.  Operating  expenses,  on  the 
other  hand,  were  in  1906  less  than  four  times  as  great  as  in 
1880.  Increasing  returns  are  quite  evident.  The  period  from 
1880  down  to  1896-1898,  before  the  recent  general  increases 
in  prices  and  wages  took  place,  shows  this  even  more  strikingly. 
In  order  to  transport  more  than  three  times  as  much  freight 
and  two  and  one-quarter  times  as  many  passengers,  it  required 
a  direct  outlay  for  operation  of  little  more  than  twice  as  much 
money.-  On  the  other  hand,  omng  to  the  rapid  rise  of  all 
operating  costs  since  1898,  a  comparison  of  expenditures  con- 
fined to  the  last  ten  years  by  themselves,  affords  an  apparent 
contradiction.     The  results  for  this  period  have  already  been 

1  From  Report  of  Commission  to  Investigate  the  Postal  Service,  1901, 
p.  220;  brought  down  to  1906  when  local  disturbances  in  wages,  other 
costs  of  operation  and  rates  outweigh  all  general  considerations. 

^  Between  1890  and  1910  freight  ton  mileage  rose  three  times  over. 
Operating  expenses  grew  by  about  two  and  one-quarter  times. 
VOL.  I — 6 


82 


RAILROADS 


given,  classified  in  greater  detail.  And  yet,  despite  this  dis- 
turbing factor  and  the  one  earlier  mentioned  that  these  later 
operating  expenses  have  been  heavily  loaded  with  improvement 
expenditures,  it  appears  by  comparison  of  1895  with  1905,  that 
passenger  business  has  more  than  doubled,  and  freight  business 
is  two  and  a  half  times  as  great,  while  operating  expenses  in 
1905  were  not  much  over  twice  their  amount  ten  years  before. 


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A  comparison  of  the  movement  of  gross  earnings  with 
operating  expenses  introduces  still  another  disturbing  factor, 
namely,  the  changes  from  year  to  year  in  the  level  of  freight 
rates  as  well  as  in  the  character  of  the  traffic  handled.  The 
effect  of  fluctuating  costs  of  production  of  transportation  hav- 
ing just  been  considered,  we  may  now  turn  to  the  fiscal  returns 
as  affected  by  the  price  obtainable  for  the  service  given.  Any 
long-time  comparison  of  results  reflects  the  influence  of  the 
steady  decline  of  freight  rates  during  the  generation  prior  to 
1900.  Thus  comparing  1880  with  1898,  as  shown  by  the  pre- 
ceding table,  operating  expenses  grew  in  the  ratio  of  100  to 
221,  while  gross  income  grew  from  100  to  only  190.     Three 


THEORY  OF  RAILROAD   RATES  83 

fold  the  freight  business  produced  less  than  twice  the  revenue. 
Pushing  the  comparison  later,  down  to  1906,  operating  expenses 
grew  after  1880  from  100  to  394,  while  gross  income  rose  to  only 
346.  This  reflects  the  influence  during  the  last  few  years  of 
the  rapid  rise  in  prices  and  wages. 

According  to  the  opposite  diagram,  comparing  1890  with 
1910,  both  operating  expenses  and  gross  income  from  operation 
seem  to  have  moved  together ;  the  curve  of  gross  revenue  rising 
proportionately  only  a  little  faster  than  that  for  operating 
expenses.  The  latter  have  risen  from  a  general  figure  of 
about  $800,000,000  before  the  depression  of  1893-1897,  to 
$1,822,000,000  in  1910;  the  former  from  about  $1,200,000,000  to 
over  $2,750,000,000.  Both  alike  somewhat  more  than  doubled, 
therefore,  in  twenty  years.  At  times,  especially  during  the  rapid 
revival  of  business  after  1897,  before  rising  prices  began  to  affect 
costs  of  operation,  extraordinary  increases  in  earnings  appeared, 
out-stripping  the  growth  of  expenditures.  Comparing  the  year 
1899  with  1895  we  find  that  the  gross  earnings  of  the  railroads 
of  the  United  States  increased  by  twenty-two  per  cent.  This 
involved  an  increased  expense  of  operation,  however,  of  only 
eighteen  per  cent.  Similar  comparison  year  by  year,  there 
having  been  an  enormous  expansion  of  business,  shows  an 
increase  in  gross  earnings  somewhat  more  rapid  than  the  growth 
of  operating  expenses.  This  differential  advantage  has  pro- 
gressively lessened  since  1902,  and  especially  since  the  let-up 
in  1907,  The  ofl&cial  returns  for  1911  with  the  marked  de- 
cline in  gross,  show  an  even  more  distinct  drop  in  net  earn- 
ings. Whether  the  need  of  an  increase  of  rates  commensurate 
with  the  augmented  operating  costs  is  imperative,  can  only  be 
ascertained  after  a  return  to  more  normal  business  conditions. 
These  relationships  would  be  the  more  striking  could  we  ex- 
clude the  enormous  expenditures  for  betterments  which  have 
been  charged  to  operating  expenses  during  these  years.  Com- 
parisons of  net  earnings  are  vitiated  by  uncertainty  upon  this 


84  RAILROADS 

point.  Working  over  these  results  by  comparison  per  mile 
of  line,  it  appears  that  the  rate  of  increase  in  earnings  per  mile 
of  line  for  five  years  prior  to  1900,  was  approximately  double 
the  rate  of  increase  of  operating  expenses  per  mile  of  line. 
The  greatly  lessened  cost  of  performing  additional  business 
becomes  at  once  apparent.  But  these  latter  conclusions,  as  has 
been  said,  cover  only  a  brief  period  of  time.  Judging  by  the 
results  over  many  years,  it  appears  that  changes  both  in  the 
level  of  freight  rates  and  of  wages  and  prices  have  operated  to 
leave  the  railroads  not  much  better  off  than  they  were  some 
time  ago.  The  only  thing  which  has  saved  them  whole  in  the 
face  of  rising  prices  and  wages  since  1900,  and  especially  since 
1907,  has  been  the  rise  of  freight  rates  and  the  enforced  im- 
provements in  operation.  With  the  methods  of  transportation, 
such  as  size  of  cars  and  locomotives  and  train  loads,  as  they 
were  a  decade  ago,  very  real  distress  would  be  more  widely 
apparent  than  it  is.  On  the  whole,  the  public  seems  to  have 
shared  in  the  benefits  of  these  improvements  to  a  considerable 
degree.  This  statement,  however  true  for  the  entire  railroad 
system  of  the  country  as  a  whole,  does  not  by  any  means  repre- 
sent the  facts  for  any  single  system.  ]\Ioreover,  it  is  not  by 
any  means  clear  how  fully  the  railroad  system  of  the  country 
has  been  enlarged  and  improved  out  of  surplus  earnings.  There 
is  reason  to  think  that  foundations  in  some  cases  — the  Penn- 
sylvania road,  for  example  —  have  been  laid  during  these 
prosperous  years,  for  largely  increased  tonnage  in  the  immedi- 
ate future  without  a  corresponding  growth  of  expenses  charge- 
able to  plant;  in  other  words,  that  the  transition  to  a  distinctly 
higher  grade  of  operation  has  been  effected  out  of  surplus 
earnings. 

The  comparison  of  gross  and  net  earnings  from  operation, 
if  expenditures  have  grown  almost  as  fast  as  gross  income, 
confirms  the  preceding  conclusions.  Surveying  the  chart  for 
the  period  since  1890,  it  appears  that  net  earnings  for  the  rail- 
roads of  the   United  States  have  more  nearly  trebled  than 


THEORY  OF  RAILROAD  RATES  85 

doubled;  the  increase  having  been  177  per  cent,  up  to  1910. 
This  takes  no  account  whatever  of  the  immense  volume  of  new 
capital  added  to  the  system.  The  entirely  distinct  question 
of  the  relative  rate  of  retm*n  upon  the  investment  will  engage 
our  attention  at  a  later  time.  Examination  of  the  years  of 
rapid  revival  after  1897  by  themselves,  however,  especially 
for  individual  companies,  shows  striking  results.  This  is  espe- 
cially true  of  roads,  not  then  developed  up  to  a  fair  working 
capacity  for  their  plants. 

An  interesting  comparison  with  the  previous  decade,  1870 
to  1880,  exemplifies  this  relation  still  further.  The  gross 
earnings  of  the  trunk  lines  of  the  United  States  decreased  very 
greatly  per  mile  of  line  from  $7,211  in  fact  to  $6,636  during  the 
decade ;  but  at  the  same  time  the  net  earnings  steadily  increased. 
This  was  due  primarily  to  the  great  volume  of  business  de- 
veloped, —  the  ton  mileage  increasing  more  than  three  fold 
during  these  ten  years.  It  happened  despite  the  fact  that  the 
miles  of  line  during  the  same  period  had  more  than  doubled. 
The  following  decade,  1880  to  1890,  was  represented  by  an 
increase  of  only  82.7  per  cent,  in  mileage,  while  the  number 
of  tons  of  freight  hauled  one  mile  increased  by  132  per  cent. 
Density  increasing  in  this  way,  a  corresponding  ability  to  carry 
at  a  lower  rate  per  ton  was  a  necessary  result.  So  indisputably 
has  this  law  —  that  an  expanding  volume  of  business  up  to  a 
certain  point,  may  profitably  be  carried  at  a  continually  low- 
ered cost  —  been  proved,  that  it  is  estimated  by  so  competent 
an  authority  as  the  Engineering  Review  that,  provided  suffi- 
cient tonnage  be  available  for  2,000-ton  freight  train  loads,  a 
cost  of  one  mill  per  ton  mile  can  be  attained.  Its  significance 
may  be  realized  from  the  fact  that  the  lowest  revenue  per  ton 
mile  reported  for  the  United  States  is  2.21  mills  per  ton  mi}e 
for  the  long  haul  soft  coal  business  of  the  Chesapeake  &  Ohio.^ 
This,  of  course,  does  not  imply  that  any  railroad  in  actual 
operation,  carrying  all  kinds  of  freight  including  a  large  pro- 
^  Cf.  data  as  to  revenue  per  ton  mile  on  p.  413,  infra. 


86  RAILROADS 

portion  of  local  traffic,  can  in  the  immediate  future  hope  to 
attain  this  result.  It  is  intended  only  to  show  that,  provided 
the  volume  of  traffic  be  large  enough,  the  cost  of  operation 
tends  to  decline  as  a  matter  of  course,  until  a  condition  of  con- 
gestion for  the  existing  plant  has  been  reached.  At  this  point 
a  new  cycle  of  costs  of  operation  and  of  profits  makes  its 
appearance. 

The  most  important  single  factor  in  the  production  of  in- 
creasing returns  upon  a  railroad  is  the  density  of  traffic;  that 
is  to  say,  the  amount  of  business  which  can  be  conducted  with 
a  given  set  of  rails,  terminals  and  rolling  stock.  In  other 
words,  it  is  the  degree  of  effective  utilization  of  the  plant  and 
equipment.  It  is  too  obvious  to  need  demonstration,  after 
what  has  been  set  forth  concerning  the  nature  of  railroad  ex- 
penditures, that  economy  of  operation  and,  consequently,  profits 
are  more  or  less  directly  dependent  upon  this  fact.  Such 
effective  utilization  of  the  property  may  be  secured  in  two 
ways:  either  by  a  large  tonnage  per  mile  of  its  line,  or  else 
by  a  concentration  of  such  traffic  as  it  may  have  into  large 
train  loads,  which  can  individually  be  transported  at  low  cost. 
The  first  of  these  economizes  the  fixed  expenses  for  roadway 
and  line  which  respond  but  slowly  to  enlargement  of  traffic,  by 
distributing  them  thinly  over  a  large  tonnage;  the  second 
economizes  the  mere  movement  expenses  which  tend  to  grow 
less  rapidly  than  the  size  of  the  trains.  For  neither  fuel  con- 
sumption nor  wages  of  train  crews  expands  'pari  passu  with  the 
paying  load.  Fortunate  the  lot  of  the  railroad  which  enjoys 
})oth  these  advantages,  of  density  of  traffic  per  mile  of  line 
and  of  tonnage  capable  of  such  concentration  in  heavy  train 
units. 

Traffic  density  —  the  tons  of  freight  carried  one  mile  per 
mile  of  line  —  is  readily  computed.  The  ton  mileage,  repre- 
senting the  total  transportation  service,  is  merely  divided  by 
the  number  of  miles  of  line  operated.  The  following  graded 
table  illustrates  the  wide  range  of  this  figure,  according  to  the 


THEORY  OF  RAILROAD   RATES 


87 


location  of  different  companies  and  the  nature  of  their  business, 
as  well  as  the  change  in  the  last  few  years.  ^ 


1902- 

3 

1910 

Traffic 
density 

. — Percentage  of   tonnage — > 

Agric'l 
products 

Products 
of  mines 

Manu- 
factures 

Traffic 
density 

Rock  Island  Company  . 

C.  M.  &  St.  P 

Great  Northern      

N.  Y.,  N.  H.  &  H 

Wabash 

428,116 

605,139 

657,102 

802,954 

885,208 

2,181,518 

2,163,000 

3,355,209 

6,337,625 

25 
23 

24 

6 

16 

29 
24 

32 
62 

44 

14 

17 

9 

8 

12 

581,000 

709,000 

814,700 

1,057,000 

1,322,000 

Baltimore  &  Ohio 

New  York  Central   .... 

Lake  Shore  ('05) 

Penn'a  Railroad  ('05)  .  . 

2,711,000 
2,548,000 
3,911,000 
5,139,000 

The  first  of  these  companies  operates  in  a  sparsely  settled 
agricultural  territory.  The  St.  Paul  system  lies  nearer  Chi- 
cago, but  is  still  largely  dependent  upon  a  local  and  rural  con- 
stituency. The  Great  Northern  —  a  great  transcontinental 
trunk  line  —  despite  its  sparsely  settled  western  area,  exchanges 
a  large  volume  of  through  freight  for  the  Pacific  Coast  for  lum- 
ber and  other  bulky  products  carried  east.  The  New  Haven 
serves  perhaps  the  most  densely  settled  area  in  the  United 
States,  but  much  of  its  traffic  is  on  branch  lines  and  is  of  a  retail 
character.  The  Wabash  lies  in  well  settled  territory  and  hauls 
a  heavy  tonnage  of  low-grade  freight.  The  last  two  are  not 
only  great  trunk  lines  to  the  seaboard,  but  also  tap  the  coal 
and  iron  fields.  Much  of  their  tonnage  is  consequently  of  low 
grade.  The  Pennsylvania  enjoys  a  still  further  advantage, 
super-adding  a  rich  local  traffic  in  manufactures  and  merchan- 
dise. As  compared  with  its  rival  trunk  line,  the  New  York 
Central,  it  hauls  relatively  little  grain;  but,  on  the  other  hand, 
1  Other  data  as  to  density  on  p.  413,  in/ra. 


88  RAILROADS 

the  New  York  Central  has  a  much  smaller  coal  and  iron  business. 
Some  one  has  aptly  characterized  the  difference  between  the 
two  roads,  describing  the  New  York  Central  as  "operating 
between  good  points,  but  not  through  a  good  country"  so  far 
as  local  business  is  concerned.  On  the  one,  through  traffic  is 
supplementary  to  local  business,  while  on  the  other  it  is  the 
reverse.  The  high  density  of  trunk  line  traffic  is  such  that 
about  two-thirds  of  all  the  tonnage  of  the  United  States  is 
transported  east  of  the  Mississippi  and  north  of  the  Ohio  river. 

Traffic  density  has  enormously  increased  during  the  last 
two  decades,  as  a  result  of  the  filling  up  of  the  country  and 
the  relative  cessation  of  new  construction.  This  is  manifested 
by  the  growth  since  1890.  In  that  year  the  density  was 
less  than  500,000  ton  miles  per  mile  of  line,  and  during  the 
depression  of  1893  it  fell  well  below  that  figure.  The  total  of 
1,053,000  reported  for  1911  represents,  therefore,  more  than  a 
doubling  of  the  density  in  twenty  years.  This  growth  during 
1898  and  1905-'06  was  notable.  The  latter  period,  especially, 
was  a  time  when  congestion  upon  all  the  roads  of  the  country 
occasioned  much  distress.  The  fact  is  evident  that  the  country 
has  well  grown  up  to  the  measure  of  its  existing  transportation 
facilities. 

The  second  measure  of  effective  operation  for  the  produc- 
tion of  increasing  returns,  is  concentration  in  the  trainload. 
This  is  regarded  by  many  as  the  supreme  test  of  efficiency  in 
management.  Great  progress  has  been  made  during  the  past 
years  in  this  regard  in  the  United  States  —  an  improvement 
which  has  largely  enabled  the  carriers  to  bear  up  under  an 
increasing  burden  of  expenditure.  The  trainload  is  generally 
adopted  today  as  the  unit  of  operation,  measuring  the  cost  of 
service.^  It  is  a  fact  that,  within  certain  limits,  the  cost  of 
handling  a  train  does  not  vary  greatly  with  its  capacity. 
Since  the  first  application  of  air-brakes  to  freight  trains  in  1887, 

1  Also  known  as  "average  tons  per  train  mile."  Obtained  by  dividing 
the  ton  mileage  by  the  sum  of  the  freight  and  mixed  train  miles. 


THEORY  OF  RAILROAD  RATES 


89 


a  train  crew  sufficient  to  handle  fifteen  cars  can  care  for  thirty 
about  as  well  in  long  haul  wholesale  business.  Fuel  cost,  also, 
as  has  been  shown,  lags  well  behind  the  rate  of  increase  of  the 
load.  Eaton  in  his  Railroad  Operations,  concludes  that  from 
thu-ty  to  fifty  per  cent,  of  cost  is  independent  of  the  trainload. 
The  effect  is  that  any  uicrement  in  the  paying  load  very 
materially  decreases  the  cost  of  operation  per  ton. 

Progress  in  the  United  States  in  increasing  the  average  train 
load  is  shown  by  the  lowest  curve  on  the  diagram  on  page  97. 
The  scale  applicable  is  along  the  left  hand  side  of  the  chart. 
From  175  tons  per  train  in  1890  to  an  average  figure  of 
383.10  in  1911  is  certainly  a  remarkable  showing.  The  most 
rapid  increase  seems  to  have  occurred  after  1897,  with  the  first 
resumption  of  general  prosperity.  As  for  individual  roads, 
the  following  table  of  average  train  loads  is  suggestive,  as 
showing  the  gradation  between  roads  of  different  type,  as  well 
as  progress  from  year  to  year: 

Average  Number  of  Tons  of  Freight  per  Train  (Tons  per  Train 

Mile) 


Road 


(Fiscal  Years) 


1901 

1905 

478 

498 

382 

420 

454 

476 

511 

557 

347 

541 

379 

416 

365 

381 

324 

367 

238 

265 

255 

259 

208 

222 

190 

194 

1910 


Pennsylvania  Railroad  (East  of  Pittsburg)  . 
Pennsylvania  Company  (West  of  Pittsburg) 

Pennsylvania  System  (Both) 

Chesapeake  &  Ohio 

Great  Northern    

Erie  Railroad   

New  York  Central  &  Hudson  River    

Northern  Pacific    

Atchison,  Topeka  &  Santa  Fe 

Chicago  &  Northwestern   

New  Haven    

Southern . 


649 
511 
607 
701 
520 
497 
413 
429 
298 
261 
293 
237 


The  great  coal  and  iron  roads,  the  trunk  lines  and  the  trans- 
continental lines  all  concentrate  their  business;  while  the  gran- 
ger roads,  like  the  Atchison  and  North  Western,  the  roads  with 


90  RAILROADS 

much  local  business  like  the  New  Haven  or  the  Southern, 
operating  in  sparsely  settled  regions,  all  have  of  necessity 
smaller  trainloads.  But  all  alike  betray  remarkable  progress 
in  this  regard.  In  1870  the  average  for  the  best  roads  was  little 
above  100  tons,  — such  as  103  tons  reported  for  the  New  York 
Central  and  137  tons  on  the  Lake  Shore.  From  this  level  to 
results  of  400  or  500  tons  on  the  average  represents  a  notable 
achievement.  The  Lake  Shore  for  1911  reports  a  revenue  train 
load  of  635  tons.  It  should  be  observed,  however,  that  such 
results  come  from  longer  trains,  not,  apparently,  so  much  from 
larger  cars.  To  raise  the  average  trainload  on  the  Wabash 
from  196  tons  in  1890  to  386  tons  in  1908  is  also  worthy  of 
note.  The  significance  of  these  recent  figures  can  be  realized 
from  the  fact  that  the  London  &  North  Western,  one  of  the 
leading  railroads  in  Great  Britain,  reports  recently  an  average 
freight  train  load  of  only  68  tons.  This  represents  probably 
a  fair  average  for  European  railroads  as  a  whole,  although  in 
England  the  general  practice  of  privately  owned  cars,  of  light 
locomotives,  short  freight  sidings,  etc.,  may  reduce  the  figure 
slightly  below  the  continental  average.  Statistics  not  only  show 
the  notable  improvement  in  recent  years;  they  at  the  same 
time  show  how  the  trainload  performance  is  affected  by  trade 
conditions.  For  nearly  every  road  the  trainloads  for  1904 
were  distinctly  lower  than  in  the  preceding  years.  This  was  a 
year  of  acute  business  depression.  The  movement  of  great 
staple  commodities,  such  as  iron  ore,  coal,  steel  and  iron  and 
lumber,  was  greatly  curtailed.  All  business  was  conducted  on 
a  narrower  basis.  Smaller  trainloads  were  an  almost  inevitable 
consequence.  The  revival  in  the  following  year,  however, 
immediately  improved  the  conditions  of  operation,  as  the  figures 
indicate. 

It  will  be  noted  that  the  figures  for  the  American  roads 
above  given  represent  averages.  These  are  compomided  from 
local  and  through  traffic  taken  together.  It  is  apparent  at 
once  that  local  trains  must  average  far  lighter  loads  than  are 


THEORY  OF  RAILROAD  RATES  91 

customary  upon  long  hauls  without  breaking  bulk.  Thus 
New  England  railroads  report  for  1906  an  average  trainload 
of  only  220  tons,  while  other  parts  of  the  country,  such  as 
the  North  Central  group,  report  426  tons  of  paying  load.  Only 
by  separation  of  local  from  through  business  can  we  adequately 
appreciate  the  enormous  advances  which  have  taken  place 
in  railroad  operation  in  the  United  States,  with  correspond- 
ing reductions  in  the  cost  of  transportation.  While  the  New 
York  Central  at  one  time  reported  an  average  trainload  of 
322  tons,  the  average  load  of  its  through  trains  on  the  main 
line  rose  as  high  as  750  tons.  More  than  twice  this  figure  is 
attained  upon  the  Pittsburg,  Bessemer  &  Lake  Erie  road  in 
hauling  ore  from  the  lakes  to  the  furnaces  at  Pittsburg.  The 
Illinois  Central,  for  its  low  grade  and  long  haul  to  the  Gulf, 
has  recently  built  locomotives  capable  of  hauling  2,000  tons 
of  net  paying  load.  A  standard  grain  train  on  the  Lake  Shore 
in  1903  consisted  of  fifty  cars  holding  forty  tons  each.  Even 
this  figure  has  recently  been  surpassed  by  the  New  York  Cen- 
tral, which,  with  its  monster  new  "mogul"  engines,  hauls  eighty 
loaded  30-ton  cars,  giving  2,400  tons  of  revenue  freight.  The 
iVIallet  locomotives  with  a  tractive  effort  of  100,000  lbs.,  at 
present  seem  to  have  reached  the  limit  of  size  and  weight. 
Seventy-five  grain  cars  holding  1,000  bushels  apiece  are  equiv- 
alent to  the  production  of  twenty  bushels  per  acre  of  an  area 
of  six  square  miles.  This  is  an  ordinary  trainload.  It  is  not 
infrequent  to  transport  a  fifth  more  than  this.  Eighty  and 
even  one  hundred  cars  in  a  train  since  1900  often  bring  the 
load  up  to  3,600  and  even  4,000  tons  of  freight.  Such  a  train 
is  over  four-fifths  of  a  mile  long.  From  these  figures  it  certainly 
appears  that  trainloads  for  long  haul  are  standardized  at  not 
less  than  2,000  tons,  a  figure  which  would  have  seemed  abso- 
lutely impossible  to  railroad  managers  of  fifteen  or  twenty 
years  ago.  The  maximum  trainload  in  Germany  on  coal 
traffic,  which,  of  course,  greatly  exceeds  any  general  average 
for  trains  of  all  classes,  is  about  five  hundred  tons.    It  has  been 


92  RAILROADS 

regarded  as  a  notable  achievement  that  this  represents  an 
increase  of  about  one  hundred  tons  in  the  last  decade. 

On  the  other  hand,  the  extravagant  promises  of  economy 
from  large  trainloads  have  been  considerably  abated  of  late. 
It  has  been  effectively  demonstrated  that  there  is  a  limit  to  such 
growth.  Only  low-grade  and  long  haul  carload  traffic  can 
profitably  be  concentrated.  In  1903,  for  instance,  a  general 
decrease  in  trainloads  followed  a  reduction  in  the  relative 
amounts  of  low  as  compared  with  high  grade  tonnage.  Less 
iron,  coal,  and  raw  materials  and  more  merchandise  and  manu- 
factures offered  for  carriage,  necessitated  a  positive  reduction 
in  the  trainloads  as  already  mentioned.  Nor  can  local  business 
in  less  than  carload  lots  profitably  be  concentrated  beyond  a 
certain  point.  Grades  must  be  uniform  to  attain  such  economy. 
The  trainload  must  not  exceed  the  traction  power  on  the  heaviest 
inclines,  or  else  expensive  pusher  engines  or  breaking  up  of 
trains  will  offset  all  other  savings.  Moreover,  too  great  train- 
loads  even  on  the  best  roadbeds  involve  slower  speeds.  Not 
only  is  other  traffic  thus  impeded,  but  the  economy  in  wages 
vanishes  after  a  certain  point  with  such  slower  movement. 
The  fashion  had  been  set  by  James  J.  Hill,  the  master  mind  in 
the  transcontinental  field.  His  notable  results,  due  to  a  careful 
working  out  of  every  detail,  led  to  a  frenzied  imitation  on  all 
sides.  Many  'roads  then  discovered  to  their  loss  that  while 
they  had  provided  rolling  stock  for  heavy  loading,  ampler  ter- 
minals, longer  sidings  and  heavier  bridges  also  were  a  necessary 
accompaniment.  Part  of  the  congestion  of  traffic  in  1906-1907, 
already  mentioned,  and  a  portion  of  the  financial  embarrass- 
ments of  recent  years,  were  undoubtedly  due  to  too  great  haste 
in  seeking  economies  of  this  sort  in  rolling  stock,  without  at 
the  same  time  making  provisions  for  enlargement  of  other 
portions  of  the  plant.  A  more  discriminating  poHcy  has  con- 
sequently resulted  of  late.  Traffic  is  being  sorted  according 
to  its  availability  for  concentration.  The  best  utilization  of 
the  rails  and  terminals  is  being  more  considered.     Business 


THEORY    OF    RAILROAD    RATES  93 

demands  for  quick  delivery  also  enter  into  the  calculation. 
Instead  of  a  few  huge  slow-moving  leviathans  blocking  other 
trains,  the  line  may  perhaps  better  be  kept  full  of  many 
smaller  trains  moving  more  nearly  together.  Such  are  cer- 
tain of  the  details  now  being  worked  out.  None  of  them, 
however,  weaken  the  main  proposition  that  a  discriminating 
concentration  of  traffic  conduces  very  greatly  to  economy  of 
operation. 

This  concentration  of  traffic  units  is  largely  due  to  technical 
improvements  of  various  kinds.  Foremost  among  these  has 
been  the  development  of  the  steel  rail.  In  1880  more  than 
seven-tenths  of  our  mileage  was  still  equipped  with  iron  rails. 
Rapid  progress  ensued  during  the  next  ten  years,  upward  of 
eighty  per  cent,  being  in  steel  rails  by  1890.  At  the  present 
time,  the  proportion  is  above  ninety-eight  per  cent.  In  fact, 
no  iron  rails  have  been  made  for  many  years,  except  for  repairs 
and  on  insignificant  branch  lines  in  remote  parts  of  the  country. 
A  steady  increase  in  the  weight  of  the  rails  has  ensued.  The 
standard  rail  for  main  lines  until  the  Civil  War  weighed  fifty- 
six  pounds  to  the  yard.  In  the  seventies  this  was  increased  to 
sixty-three  and  above;  in  the  latter  eighties  the  best  practice 
was  to  use  seventy-five  pound  sections.  Since  1900,  they 
frequently  run  as  high  as  one  hundred  pounds,  in  regions  of 
dense  traffic.  Few  main  lines  of  track  now  average  less  than 
seventy-five  pounds.  It  is  this  increase  in  the  use  and  size  of 
steel  rails  which  has  permitted  improvements  in  rolling  stock. 
But,  on  the  other  hand,  grave  dissatisfaction  with  the  quality 
of  the  rails  manufactured  of  late  years,  particularly  since  the 
establishment  of  practical  monopoly  under  the  United  States 
Steel  Corporation  has  become  manifest.  Numerous  accidents 
due  to  breakage  of  rails,  especially  since  1905,  have  revealed 
either  defects  in  manufacture  or  an  undue  load  imposed  by 
heavier  rolling  stock,  too  high  speed,  or  both.  The  matter 
has  become  steadily  worse.  In  1902  the  Interstate  Commerce 
Commission  ascribed  seventy-eight  accidents  to  broken  rails. 


94  RAILROADS 

Nine  years  later  the  number  had  risen  to  249.     The  need  of 
improvement  is  now  fully  recognized  on  all  sides. 

The  power  and  efficiency  of  locomotives  has  increased,  per- 
haps, more  since  1890,  and  particularly  since  1895,  than  in  any 
previous  period.  Superior  materials  particularly  have  con- 
tributed to  this  result,  such  as  the  substitution  of  cast  steel 
for  cast  iron  and  of  nickel  steel  for  wrought  iron  in  axles,  crank 
pins,  etc.  Some  of  the  improvements  which  may  be  mentioned 
are,  for  instance,  an  increase  in  the  average  heating  surface 
from  2,000  in  1890  to  nearly  3,000  square  feet  at  the  present 
time,  and  an  increase  in  the  average  steam  pressure  from  160 
pounds  to  210  pounds  per  square  inch  in  the  same  period.  The 
maximum  weight  has  also  increased  very  rapidly.  The  aver- 
age weight  of  a  locomotive  at  the  close  of  the  Civil  War  was 
approximately  90,000  pounds.  This  has  increased  in  some- 
what the  following  proportions:  To  1881,  102,000  lbs.;  to 
1893,  135,000  lbs.;  to  1895,  148,000  lbs.;  to  1898,  230,000  lbs.; 
rising  in  1900  to  250,000  lbs.  Passenger  locomotives  since 
1892  have  almost  doubled  in  weight,  and  freight  engines  have 
more  than  done  so.  Compound  and  double  or  Mallet  loco- 
motives are  also  supplanting  those  of  simpler  type  for  peculiarly 
heavy  service.  The  first  compound  engine  was  built  in  1899, 
only  one  being  constructed  in  that  year.  In  1900  a  single 
locomotive  works  turned  out  500  —  a  number  constituting 
two-thirds  of  the  entire  output  of  that  company  —  for  use  in 
the  United  States.  Such  locomotives  cost  more  in  first  in- 
stance; but  the  greater  weight  and  steam  capacity,  together 
with  the  considerable  saving  in  fuel,  amounting  to  perhaps 
twenty  per  cent.,  more  than  offset  this  objection.  The  traction 
efficiency  of  these  improved  locomotives  may  be  shoAvn  by  the 
statement  that  in  1885  the  decapod  Baldwin  locomotives, 
made  to  haul  3,600  tons  on  a  level,  represented  the  maximum 
capacity.  Five  years  later  the  same  company  built  locomotives 
to  haul  4,000  tons,  not  only  on  a  level,  but  on  any  ordinary 
grade.     As  indicative  of  late  advances  in  locomotive  construe- 


THEORY   OF    RAILROAD    RATES  95 

tion,  we  may  instance  those  built  about  1900  for  the  lUinois 
Central  and  the  Union  Railroad  at  Pittsburg,  both  low-grade 
roads,  carrying  exceedingly  heavy  train  loads.  The  first 
of  these  weighed,  including  its  tender,  365,000  lbs.,  the  Union 
Railroad  consolidation  engines  weighing  334,000  lbs.  Such 
locomotives  are  stated  to  be  twice  as  powerful  as  the  best  which 
were  manufactured  twenty-five  years  ago.  This  record  is  sur- 
passed by  engines  which  have  just  been  built  for  pusher  service 
on  the  soft-coal  Virginian  Railway.  They  are  of  the  Mallet 
type,  weighing  540,000  pounds;  with  a  train  capacity  of  4,230 
tons.  The  evaporative  surface  is  6,760  square  feet.  As  sum- 
marizing the  increased  efficiency  of  American  locomotives,  we 
may  instance  the  figures  of  the  Interstate  Commerce  Commis- 
sion, showing  the  average  performance  of  locomotives  for  the 
United  States.  Whereas  in  1894  the  average  number  of  tons 
of  freight  carried  per  locomotive  was  about  32,000  tons,  this 
rose  to  46,000  tons  in  1899,  and  to  54,600  tons  in  1906.  At  the 
same  time  the  number  of  tons  of  freight  hauled  one  mile  for  each 
freight  locomotive  in  the  United  States  increased  from  4,000,000 
in  1894  to  approximately  6,000,000  in  1899,  and  to  7,300,000 
in  1910.  In  other  words,  the  average  performance  of  each 
freight  locomotive  in  the  United  States  has  increased  by  more 
than  fifty  per  cent,  in  the  last  decade. 

The  economy  of  large  freight  cars  has  been  amply  dem- 
onstrated. Marked  advances  in  the  average  capacity  have 
taken  place  in  the  last  few  years.  In  the  sixties  a  15,000 
pound  freight  car  represented  about  the  normal  capacity. 
This  has  increased,  as  measured  by  maximum  load,  to  28,000 
pounds  in  1873;  to  40,000  pounds  in  1875;  to  60,000  pounds 
in  1885;  to  70,000  pounds  in  1895;  while  at  the  present  time 
80,000  to  100,000  pound  cars  are  in  everyday  use.  Cars  of 
this  latter  type,  built  to  carry  forty  to  fifty  tons,  are  necessarily 
of  pressed  steel  construction,  and  are  mainly  useful  for  the 
carriage  of  coal  and  ore  and  similar  low-grade  commodities. 
It  seems  to  be  questionable  whether  a  maximum  capacity  has 


96  RAILROADS 

not  been  about  reached,  in  view  of  the  exceedingly  great  wear 
and  tear  imposed  upon  track,  bridges,  etc.  Up  to  this  point 
the  economy  of  heavy  loading  is  indisputably  proved.  In- 
creased size  of  cars  far  more  than  proportionately  increases  the 
paying  load.  Thus,  for  instance,  an  18,000-pound  car  will 
carry  20,000  pounds  load,  while  a  22,000-pound  car  will  carry 
a  load  twice  as  great.  It  is  stated  on  good  authority,  for 
example,  that  a  car  of  forty  tons  capacity  can  be  built  which 
will  weigh  but  3,000  pounds  more  than  a  thirty-ton  car,  and 
cost  hardly  fifty  dollars  more.  This  is  undoubtedly  the  reason 
why  at  the  present  time  the  average  load  per  car  is  at  least 
one  hundred  per  cent,  greater  than  the  maximum  which  was 
possible  twenty  years  ago. 

A  steady  increase  in  the  freight  performance  of  American 
equipment  is  shown  by  official  data  of  the  Interstate  Com- 
merce Commission.  Whereas  in  1894  it  required  on  an  average 
1,888  freight  cars  for  every  1,000,000  tons  of  freight  transported 
their  capacity  has  so  increased  that  the  same  amount  of  traffic 
in  1906  was  carried  by  only  1,127  cars.  In  other  words,  an 
enormous  increase  in  the  freight  service  had  been  attained. 
On  the  other  hand,  the  actual  mileage  performance  of  much  of 
this  equipment  is  extraordinarily  low.  It  averages  only  about 
9,000  miles  annually  or  an  equivalent  of  thirty  miles  a  day. 
At  a  speed  of  fifteen  miles  an  hour,  this  means  that  actual 
niovement  under  a  paying  load,  allowing  for  one-third  of  its 
journey ings  empty,  occupies  but  little  over  an  hour  and  a 
quarter  a  day.  The  actual  performance  is,  however,  not  quite 
as  poor  as  appears.  For,  of  course,  this  average  includes  the 
non-movement  of  all  cars  in  bad  order  (sometimes  one-tenth 
of  the  total) ;  and  also  all  idle  equipment.  This  latter  consider- 
ation is  of  great  moment.  Special  cars,  suitable  only  for 
seasonal  business;  and  especially  demurrage  delays,  often 
forty-eight  hours  or  more,  adversely  affect  the  result.  Where 
separate  mileage  records  of  "foreign"  cars  are  kept,  as  on  the 
Wabash  system,  it  appears  that  their  mileage  is  twice  as  high 


THEORY    OF    RAILROAD    RATES 


97 


as  for  "  home  "  cars.  The  difference  is  due  to  the  fact  that  cars 
off  their  own  rails,  mainly  are  in  actual  demand  and  are  kept 
moving.  Probably  the  daily  performance  of  loaded  cars  is 
not  less  than  150  miles.  But  a  journey  of  this  length,  with  two 
days'  delay  at  each  end  at  terminals,  would  bring  the  average 
down  to  about  thirty  miles.  The  public  does  not  always 
appreciate  these  facts;  and  is  often  querulous.  It  is  certain 
that  the  problem  how  to  secure  greater  efficiency  in  the  use  of 
this  equipment  is  as  yet  imperfectly  solved.^ 


/f«».n 


The  discussion  of  the  nature  of  railroad  expenditure  may  be 
concluded  by  a  comparison  of  the  net  effects  of  the  develop- 
ments of  the  last  few  years;  that  is  to  say,  of  steadily  expand- 
ing costs  of  operation  and  of  slowly  and  tardily  rising  rates 
chargeable  for  service  on  the  one  hand,  as  over  against  the 
results  obtained  by  mechanical  improvements  and  increasing 
economy  of  operation  coupled  with  growth  of  tonnage,  on  the 
other.  The  average  cost  of  transportation  has  greatly  in- 
creased. This,  according  to  the  statistics  of  the  Interstate 
Commerce  Commission,  is  showTi  upon  the  diagram  herewith 


1  Cf.  Quarterly  Journal  of  Economics,  XVIII,  p.  299;  on  -per  diem 
reform.  Also,  Railway  Age,  1903,  p.  136;  15th  Ann.  Rep.,  I.C.C,  p.  79; 
and  Circular  Letters,  1901,  Chicago  Bureau  of  Car  Performances. 

VOL.  I — 7 


98  RAILROADS 

by  the  middle  curve.  ^  The  average  cost  of  running  all  trains 
per  mile,  which  had  fallen  from  96  cents  in  1891  to  91.8  cents 
in  1895,  rose  to  $1.07  in  1900,  and  in  1911  increased  by  more 
than  one-third,  to  $1.54  per  mile.  Against  this  should  be  set 
the  fact  that  while  the  trains  thus  cost  more  to  haul  per  mile, 
their  paying  load  has  increased  in  somewhat  smaller  propor- 
tion. This  is  shown  by  the  upper  curve  on  the  diagram  above 
mentioned.  For  freight  trains  the  increase  has  been  from  $1.65 
to  $2.89  per  mile.  Passenger  revenues  per  train  mile  have 
increased  less  rapidly.  This  follows  from  the  well-known  fact 
that  freight  rates  have  been  increased,  while  passenger  rates 
have  not  changed  for  the  better  during  this  period;  and  also 
that  economies  in  concentration  of  traffic  are  necessarily  con- 
fined to  the  carriage  of  freight.  The  immense  gain  in  trainloads 
has  probably  been  the  main  element,  among  these,  as  already 
observed. 

Among  other  things  this  diagram  also  brings  out  the  effect 
upon  revenue  of  the  substantial  rate  increases  after  1900, 
coupled  with  the  elimination  of  rebate  losses.  It  will  be  ob- 
served how  sharply  the  upper  curve  of  revenue  per  train 
mile  slants  upward  after  1899,  by  comparison  with  the  lower 
line  denoting  cost.  The  same  thing  apparently  occurs  again 
after  the  set-back  of  1907. 

The  interrelation  between  these  various  factors  may  be 
more  readily  shown  by  confining  our  attention  to  the  period 
during  which  a  practically  uninterrupted  development  of  busi- 
ness ensued,  thus  eliminating  the  confusion  due  to  the  four 
years  of  depression  after  1893.  The  data  on  our  various  charts 
for  the  years  1898-1906  demonstrate  that  during  this  period  the 
ton  mileage,  measuring  the  freight  traffic  handled,  has  practi- 
cally doubled.  To  transport  this  doubled  tonnage,  a  growth  in 
freight  train  mileage  of  only  eighteen  per  cent,  was  necessary. 
This  was  due,  of  course,  to  the  notable  concentration  of  train 
loading,  already  described,  as  well  as  to  a  density  of  traffic 
1  Using  the  right  hand  scale. 


THEORY    OF    RAILROAD    RATES  99 

per  mile  of  line  almost  sixty  per  cent,  greater.  As  a  conse- 
quence of  these  economies  in  operation,  the  revenue  per  freight 
train  mile  has  increased  by  about  fifty  per  cent  ;  while  the 
average  cost  of  running  all  trains  per  mile  has  grown  less  rapidly, 
namely,  by  42  per  cent.  Had  we  data  for  freight  trains  alone 
it  would  surely  be  lower  than  this.  In  the  meantime  during 
this  period  of  eight  years,  the  rate  of  return  in  revenue  per  ton 
mile  received,  remained  practically  unchanged.^  From  all 
of  which  it  would  appear  that  even  despite  all  these  confusing 
factors,  the  law  of  increasing  returns,  so  far  at  least  as  1898 
-'06  was  concerned,  was  making  itself  appreciably  felt. 

Attentive  consideration  of  the  available  figures,  especially 
as  shown  by  diagram  on  page  97,  shows  apparently  that  the 
various  economies  in  operation,  heavier  trainloads  and  the 
like,  have  not  since  1906  yielded  any  greater  profit  from  mere 
operation,  with  the  ever  increasing  volume  of  business.  In 
other  words,  the  increase  in  the  margin  between  cost  of  opera- 
tion and  revenue  per  train  mile,  —  measuring  profitableness 
per  unit  of  movement  —  has  not  kept  pace  with  the  augmenta- 
tion of  the  size  of  that  unit,  —  the  trainload.  Thus  it  follows, 
as  one  would  expect,  even  making  allowance  for  all  changes  in 
rates,  wages  and  other  expenses,  that  the  law  of  increasing 
returns  as  applied  to  railroads,  does  not  arise  primarily  from 
economic  considerations  as  to  mere  physical  operation.  The 
law  originates  primarily  in  the  fiscal  conditions  attaching  to 
the  heavy  capital  investment,  —  the  fact,  namely,  that  fixed 
charges  up  to  a  given  point  of  saturation  tend  to  remain  con- 
stant, absolutely;  but  become  proportionately  less,  there- 
fore, as  the  volume  of  business  expands.  From  this  fact, 
therefore,  rather  than  because  of  any  marked  economies  of 
large-scale  production,  may  it  be  affirmed  that  railroads  offer 
a  notable  example  of  the  law  of  increasing  returns.  The  im- 
portant bearing  of  this  distinction  will  appear  in  due  time  in 
connection  with  the  problem  of  the  determination  of  reasonable 
^  Diagram  on  p.  413,  infra. 


100 


RAILROADS 


rates.  Added  significance,  also,  is  given  to  the  relation  be- 
tween the  cost  of  new  capital,  measured  by  the  rates  of  interest 
on  bonds  and  dividends  on  stocks,  and  the  supply  necessary 
to  provide  adequate  extensions  and  improvements  in  future. 

Af-pendix: 

The  subjoined  chart,  reproduced  by  the  Railway  Age  Gazette 
from  a  bulletin  of  the  Bureau  of  Railway  Economics,  brings  out 
forcibly  the  manner  in  which,  within  the  short  time  limits  of  full 
utilization  of  plant,  a  large  increase  of  business  can  take  place  without 
a  commensurate  growth  of  expenses.  The  phenomenon  for  railroads 
is  of  course  cycUcal.  Annually,  as  here  indicated  for  1911,  the  second 
half  of  the  year  is  marked  by  a  much  heavier  movement  of  traffic, 
principally,  of  course,  the  crops.  But  expenses  never  rise  in  proportion. 
This  is  most  evident  for  the  eastern  group  of  roads,  as  here  showTi. 
This  causes  the  net  revenue  curve,  also,  to  vary  much  more  than  in 
proportion  to  the  volume  of  traffic,  in  consequence. 


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Monthly  Revenues  and  Expenses  per  Mile  of  Line  from  1911  and  1912. 


CHAPTER  IV 

RATE   MAKING   IN   PRACTICE 

Evolution  of  rate  sheets,  101.  —  Terminal  v.  haulage  costs,  102.  —  Local 
competition,  104.  —  What  the  traffic  will  bear,  107.  —  Trunk  line  rate 
system.  111.  —  Complexity  of  rate  structure,  113.  —  Competition  of 
routes,  114.  —  Competition  of  facilities,  116.  —  Competition  of  mar- 
kets, 118.  —  Ever-widening  markets,  119.  —  Primary  and  secondary 
market  competition,  121.  —  Jobbing  or  distributive  business,  124. — 
Flat  rates,  127.  —  Mississippi-Missouri  rate  scheme,  128.  —  Relation 
between  raw  materials  and  finished  products,  134.  —  Export  rates  on 
wheat  and  flour,  135.  —  Cattle  and  packing-house  products,  139.  — 
Refrigerator  cars,  140.  —  By-products  and  substitution,  142.  —  Kansas 
corn  and  Minnesota  flour,  143.  —  Ex-Lake  grain  rates,  145.  — 

The  task  of  constructing  a  freight  or  passenger  tariff  is 
an  eminently  practical  one.  The  process  must  be  tentative 
and  experimental.  Little  can  be  calculated  in  advance.  Tariffs 
are  not  made  out  of  hand;  they  grow.  Not  until  a  rate  has 
been  put  into  effect,  can  its  results  be  known.  The  lower 
limit  of  charges,  however,  is  more  or  less  fixed.  Obviously 
the  rate  must  not  be  less  than  that  portion  of  the  variable 
expenses  incident  to  each  particular  unit  of  business.  This 
variable  expense  is  divisible  into  two  parts,  one  for  loading 
and  unloading,  and  the  other  for  actual  movement.  The  first 
step  in  constructing  a  tariff,  therefore,  is  to  separate  these 
two  portions  of  the  variable  outgo.  General  experience  fixes 
the  terminal  outlay  for  loading  and  unloading  at  an  average 
figure  of  about  twenty  or  twenty-five  cents  per  ton  at  each 
end  of  the  line;  that  is  to  say,  at  an  average  of  about  two  and 
one-half  cents  per  hundred  pounds  as  the  total  terminal  cost.^ 
Just  where,  above  or  below  this  average,  the  figure  for  any 
particular  tariff  will  lie,  depends  upon  a  multitude  of  details. 

'  Testimony  before  the  Hepburn  Committee,  in  1879,  p.  2921,  is 
interesting  on  this  point. 


102 


RAILROADS 


This  terminal  expense  is  obviously  quite  independent  of  the 
length  of  the  haul.  It  costs  no  more  to  load  for  a  carriage  of 
3,000  miles  than  for  one  between  two  adjoining  stations.  It 
is  the  second  portion  of  the  specific  costs,  namely,  the  move- 
ment expense,  which  varies  with  the  distance.  This  movement 
cost  is  more  difficult  of  determination,  as  affected  by  a  mul- 
titude of  variable  factors,  such  as  the  grades,  curvature,  number 
of  stops,  the  size  of  train  load,  and  above  all,  the  volume  of 
the  traffic.  Assuming  the  simplest  physical  conditions,  one 
would  expect  the  movement  expense,  aside  from  the  initial 
cost  of  getting  up  steam  in  order  to  move  at  all,  to  rise  pro- 
portionately to  the  distance  traversed.  Graphically  repre- 
sented, the  tariff  would  appear  somewhat  as  follows: 


Relation  of  Cost  of  Carriage  to  Distance. 


In  this  diagram  the  distances  of  carriage  are  represented 
along  the  horizontal  line,  A  B;  while  the  rate  charged  is  laid 
off  vertically.  The  distances  A  C  and  E  B  represent  the  con- 
stant terminal  cost ;  while  the  steadily  rising  rates  with  increasing 
distance,  due  to  movement  expenses,  are  sho-s^Ti  by  the  sloping 
dotted  line  C  D.  This  chart  at  once  demonstrates  why  under 
the  very  simplest  physical  conditions  a  straight  mileage  tariff 
is  unscientific  and  unreasonable.     For  the  constant  terminal 


RATE  IVIAKIXG  PRACTICE 


103 


expense,  spread  evenly  over  the  mileage  traversed  as  the  move- 
ment expenses  grow,  becomes  progressively  less  and  less  in  pro- 
portion to  the  total  of  the  two,  which  constitutes  the  real  rate. 
The  longer  the  haul,  the  lower  the  ton-mile  cost  as  a  matter  of 
necessity.  As  Chanute  calculated  on  the  New  York  Central 
a  generation  ago,^  while  the  average  cost  per  mile  of  hauling  a 
ton  ten  miles  was  4.062  cents,  it  descended  progressively  to 
less  than  one  cent  per  mile  for  distances  over  five  hundred  miles. 
A  common  rule  is  that  the  rate  rises  as  the  square  root  of  the 
distance,  rather  than  in  proportion  to  it.  A  hundred-mile  haul 
represents  a  cost  approximately  only  twice  as  great  as  one  of 
twenty-five  miles,  instead  of  being  four  times  as  much.  For 
thrice  a  given  cost  the  haul  may  be  increased  nine  times.  The 
course  of  such  a  tariff  with  increasing  distance  would  be  repre- 
sented by  the  parabolic  curved  lines  on  the  preceding  diagram.^ 


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Diagram  of  Belgian  Tariff  Sheets. 

The  particular  curve  would  depend  upon  the  commodity  and 
local  phj'sical  conditions.  In  territory  where  movement 
expenses  were  heavy  or  operation  difficult,  the  curve  would 
obviously  rise  more  rapidly.     Such  a  mathematical  tariff  does 


^  U.  S.  Reports  on  Internal  Commerce,  1876,  p.  25. 
2  U.  S.  Industrial  Commission,  1900,  IX,  p.  631.    C/.  also  diagram  of 
European  tariffs  in  Senate  (Elkins)  Committee,  1905,  V,  App.  p.  271. 


104  RAILROADS 

not  depart  widely  from  the  one  traced  by  the  heavy  dotted 
Hne  C  D  first  described.  The  progressive  decluie  of  the  per 
mile  rate  with  increasing  distance  may  be  illustrated  by  the 
rough  estimate  of  allowing  two  and  one-half  cents  per  hundred 
weight  or  fifty  cents  per  ton  for  terminal  cost,  with  one-half 
cent  additional  per  mile  for  movement  expenses.  For  a  ten- 
mile  haul  this  would  cost  fifty-five  cents,  or  an  average  of  5.5 
cents  per  mile.  Were  the  distance  500  miles,  the  average  cost 
would  be  only  ^-^5^  cents  or  0.6  cents  per  ton  mile. 

Thus  far  the  problem  has  been  seemingly  simple.  The  next 
step  introduces  new  complications.  Our  hypothetical  railway 
line  at  a  point  one  hundred  miles  out,  may  cross  a  navigable 
river  or  canal,  or  may  intersect  another  railway.  Engineering 
considerations  of  absolute  cost  of  operation  now  no  longer 
predominate.  Relative  costs  by  rival  lines  enter  uito  the  case. 
Water  lines  or  more  direct  railways  compete  for  the  traffic. 
One  cannot  even  fall  back  upon  the  cost  of  carriage  by  any  of 
these  lines,  either  the  weaker  or  the  stronger.  An  entirely  new 
principle  comes  into  play.  The  alternative  is  presented  of 
taking  the  business  at  a  rate  lower  than,  and  out  of  line  with, 
rates  on  general  traffic,  rather  than  to  lose  it  to  another  line. 
At  first  sight  it  would  appear  that  it  were  better  to  abandon 
the  traffic  than  to  take  it  for  less  than  a  fair  average  return  or 
profit.  This  is  a  serious  matter.  The  tonnage  offered  is  large. 
The  existence  of  active  competition  for  it,  is  proof  of  its  im- 
portance. Railways  meet  at  large  towns,  and  large  towns  be- 
come larger  because  the  roads  meet  there.  The  main  reason  for 
not  abandoning  the  traffic,  however,  arises  from  that  primary 
fact,  to  which  one  constantly  recurs,  that  all  ex-penses  are  not 
alike  in  their  nature.  A  concrete  example  will  make  this  plain. 
Suppose,  for  instance,  the  normal  rate  to  yield  a  fair  average 
return,  all  expenses  considered,  be  thirty  cents  per  hundred- 
weight. Two-thirds  of  the  cost  of  this,  or  twenty  cents,  would 
not  cease  as  outgo,  were  this  business  abandoned.  The  rails 
would  rust,  the  ties  would  rot,  and  trains  would  move  but  with 


RATE  MAKING  PRACTICE  105 

lighter  loads,  and  the  fixed  charges  would  still  go  on  inexorably 
night  and  day.  Ten  tents  per  hundredweight  will  meet  the 
variable  and  extra  cost  incident  to  this  particular  business. 
A  fifteen-cent  rate  would  at  least  repay  these  extra  outlays.  It 
would  do  more.  It  would  contribute  five  cents  per  hundred 
pomids  to  the  twenty  cents  outgo  per  hundredweight,  which, 
without  the  traffic,  would  have  to  be  borne  in  toto.  Even  a 
rate  of  eleven  cents  would  contribute  something  to  this  end. 
For  it  would  leave  a  surplus  of  one  cent  per  hundredweight 
to  lighten  the  other  burden.  Adopting  Hadley's  phraseology,^ 
if  you  take  at  eleven  cents,  freight  that  costs  you  thirty  cents 
to  handle,  you  lose  nineteen  cents  on  every  hundredweight.  If 
you  refuse  to  take  it  at  that  rate,  you  lose  twenty  cents  on 
every  hundredweight  you  do  not  carry.  For  your  constant 
expenses  go  on,  w^hile  the  other  road  gets  the  business.  There 
is  only  one  course  open.  The  rate  at  the  competitive  point 
must  be  cut;  if  not  to  make  a  profit,  at  least  to  stop  a  greater 
loss.  And  one  comfort  may  be  uncovered  in  so  doing.  The 
lowered  rate  may  so  stimulate  new  business  and  enlarge  the 
volume  of  traffic,  that  it  may  be  handled  at  much  lower  cost. 
In  fact,  this  consideration  alone  in  absence  of  all  competition, 
may  induce  a  lowering  of  rates  at  certain  points  out  of  line 
with  the  general  schedule.  This  incentive,  conditioned  by  the 
fact  of  increasing  returns,  is  always  in  the  background.  The 
destiny  of  many  places  is  manifested  in  terms  beyond  the 
control  of  the  carrier.  Soil  may  be  poor,  climate  or  population 
adverse  to  progress.  But  some  particular  places  enjoy  peculiar 
advantages  for  growth.  Not  to  stimulate  new  business  at  these 
points  where  traffic  might  be  cultivated,  even  without  rivals  in 
the  field,  is  little  better  than  allowing  it  to  escape  over  a  com- 
petitor's line  of  rails,  were  they  present. 

Cutting  the  normal  rate  at  competitive  points  or  at  im- 
portant points  in  order  to  stimulate  traffic,  in  conformity  with 
the  principle  above  stated,  transforms  our  tariff  diagram  as 

1  P.  165,  infra. 


106 


RAILROADS 


showTi  herewith.  The  rate  rises  steadily  with  the  increasing 
distance  from  A,  except  at  E  and  F.  At  these  points  it  is  fixed 
at  a  lower  point,  determined  not  primarily  by  the  cost  of  service 
at  all,  but  by  the  available  demand  for  it.  Traffic  at  these 
points  is  charged  what  it  will  bear;  not  as  much  but  as  little 
as  it  will  bear :  which,  being  translated,  means  that  the  charge 
is  set  as  high  as  possible,  still  holding  the  volume  of  business 
constant,  or  even  increasing  it  if  that  can  be  accomplished. 
The  total  profit  is  constituted  of  the  profit  per  unit  of  freight 
multiplied  into  its  volume.     The  centre  of  interest  is  here 


C     B  D 

Effect  of  Competition  at  Certain  Places  on  Rates. 


shifted  from  the  average  profit  per  unit  considered  alone,  to 
the  total  profit  thus  obtained.  At  this  point  another  difficulty 
presents  itself.  Although,  as  set  forth  elsewhere,  local  discrim- 
ination, —  charging  a  lower  rate  for  a  more  distant  point,  — 
may  sometimes  not  only  be  not  injurious  but  actually  beneficial 
to  all  parties  concerned,  it  is  the  exception,  not  the  rule.^  Ordi- 
narily to  accord  a  remote  point  a  lower  rate  without  patent 
cause,  is  an  economic  anomaly,  and,  moreover,  a  political 
blunder.  It  violates  the  democratic  principle  of  cost  of  service 
as  underlying  rate  schedules.  Most  legislative  bodies  have 
prohibited  it  by  law.  The  United  States  and  most  of  the 
American  commonwealths  do  not  permit  it,  other  than  in  ex- 
»  C/.  chap.  VII,  in^ra. 


RATE  MAKING  PRACTICE  107 

ceptional  cases.  The  result  is  that  on  our  hypothetical  tariff, 
the  rates  from  A  to  points  intermediate  between  A  and  B  and 
B  and  D  must  be  cut  to  the  levels,  E  and  F,  fixed  for  those 
latter  places.  Such  was  the  action  taken  by  the  trunk  hnes 
in  1887  in  conformity  with  the  requirements  of  the  long  and 
short  haul  clause  of  the  Federal  Act  to  Regulate  Commerce. 
An  original  progressively  rising  tariff  is  thus  at  once  trans- 
formed to  a  series  of  level  grades  or  platforms,  the  shifts  of  level 
corresponding  to  the  location  of  large  to^Tis  or  competitive 
centres;  and  the  grade  of  each  platform  being  fixed  by  the 
rate  determined  under  competition  at  those  points.^  This  as- 
cending series  of  grades  may  be  most  irregular,  as  conditioned 
by  local  circumstances.  The  general  steepness  of  the  grada- 
tion is  low  on  eastern  roads  like  the  New  York  Central,  with 
a  large  volume  of  traffic  and  easy  operating  conditions.  On 
western  lines  like  the  Denver  and  Rio  Grande,  in  rugged  terri- 
tory, with  a  sparse  population  and  hght  tonnage,  the  per  mile 
rate  rises  rapidly  and  the  gradation  of  the  general  tariff  is  steep. 
But  always  it  will  be  found  that  the  changes  in  rates  occur  at 
competitive  points,  with  transition  to  a  new  level  of  rates 
determined  by  the  conditions  at  the  next  competitive  point 
beyond. 

An  important  fact  concerning  this  tariff  thus  far  developed, 
is  that,  of  course,  the  height  of  the  upper  level  at  the  most  remote 
point  must  never  exceed  what  the  particular  traflSc  will  bear. 
In  other  words,  supposing  that  the  traffic  consist  of  grain  or 
coal,  not  more  than  a  certain  amount  could  ever  be  charged, 
no  matter  how  great  the  distance,  without  so  far  diminishing 
the  profit  in  the  transaction  as  to  render  the  business  impossible. 
This  is  sho^\Ti  by  the  diagi'am  opposite  the  next  page,  whereon 
it  appears  that  each  commodity,  coal,  wheat,  cement,  lumber, 
or  oil,  having  attained  a  certain  level  of  rates,  never  rises  there- 
after, no  matter  what  the  distance.     Each  attains  the  maxi- 

1  Such  a  tariff  on  the  IlHnois  Central  is  charted  in  Reports,  U.  S.  Indus- 
trial Commission,  IX,  p.  295. 


108  EAILROADS 

mum  of  what  it  will  bear.  That  level  it  can  never  exceed. 
This  immediately  leads  to  another  consideration.  No  single 
tariff  is  applicable  to  any  large  number  of  commodities.  Each 
one  must  be  regarded  as  a  law  unto  itself.  Not  only  does  the 
ultimate  amount  which  each  is  able  to  bear  depend  upon  the 
value  of  that  commodity,  but  also  the  conditions  determining 
competition  with  respect  to  it  must  be  different  all  along  the 
line.^ 

Thus  it  appears  that  the  height  of  the  extreme  upper  level 
in  our  diagrammatic  series  of  rates  is  fixed  by  the  highest 
charge  v/hich  that  particular  traffic  will  bear.-  Beyond  a  certain 
point,  no  matter  how  great  the  distance,  the  rate  cannot  be 
increased  above  this  level.  This  maximum  varies,  of  course, 
with  each  commodity.  On  cotton  it  may  be  fifty-five  cents 
per  one  hundred  pounds ;  on  grain  or  coal  it  will  be  much  lower, 
and  on  sand  or  cement  lower  still.  The  problem  of  the  traffic 
manager  is  to  attain  this  highest  rate  as  speedily  as  possible 
with  increasing  distance,  and  to  grade  his  rates  with  distance 
up  to  this  level  as  quickly  as  possible,  consistent,  of  course, 
with  maintenance  of  a  full  volume  of  business.  But  not  only 
may  the  final  limit  of  what  the  traffic  will  bear  be  different  for 
each  commodity;  the  steps  or  stages  by  which  the  rate  progresses 
up  to  this  maximum,  are  quite  independently  determined. 
The  actual  tariffs  of  local  class  rates  in  general  are  much  simpler 
than  the  commercial  conditions  of  rate  making  often  warrant. 
Probably  the  major  portion  of  tonnage  on  American  railways 
moves  under  special  or  commodity  rates.  Even  in  Prussia 
over  three-fifths  of  the  traffic  is  of  this  exceptional  sort.  These 
special  rates  are  made  with  a  view  to  particular  circumstances 
prevalent  at  the  time.  Bids  from  a  quarryman  in  Vermont  on 
stone  for  a  public  building  in  Chicago,  may  be  dependent  upon 

'  Such  are  commodity  as  distinct  from  class  rates,  described  in  con- 
nection with  classification  in  chap.  IX. 

2  Tapering  rates  are  discussed  by  J.  IM.  Clark  in  Columbia  University 
Studies  in  History,  etc.,  XXXVII,  1910,  chaps.  IX  and  X.  CJ.  also 
Hammond,  Railway  Rate  Theories,  etc.,  1911,  p.  70. 


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1  fejuH"  rTT  1  III  1  1  III  1  1  III  1  1  III  1  1  III  1  1  III  1  1  1  1  i.j. 

Rates  Between  Chicago  and  St.  Paul.     Distances  in  Miles  from  Chicago. 


RATE  MAKING  PRACTICE  109 

the  grant  of  a  low  rate  on  his  marble  in  competition  with  a 
quarry  in  North  Carolina,  also  able  to  supply  the  particular 
stone  required.     The  various  ascending  series  of  rates  are  thus 
rendered  bewilderingly  complex.     This  is  also  showTi  by  the 
foregoing  diagram  of  rates  between  St.  Paul  and  Chicago.^     The 
rate  on  a  cheap,  heavy  commodity  like  coal,  probably  rises 
rapidly  at  first,  and  soon  attains  a  maximum  beyond  which  it 
can  never  go.     On  this  diagram,  for  instance,  the  freight  rate 
on  soft  coal  for  points  up  to  180  miles  out  is  lower  than  that 
on  flour.     Beyond  that  point  the  coal  rate  in  turn  exceeds 
that  on  flour.      Cement  is  higher  than  lumber  for  the  first  150 
miles;  but  after  that  point  the  relatively  greater  value  of  lum- 
ber holds  it  steadily  above  cement.     On  heavy  cheap  com- 
modities the  relatively  high   cost  of  cartage  in   competition 
enables  the  railway  to  reap  the  full  measure  of  its  advantage 
and  to  charge  well  up  to  the  maximum  of  what  the  traffic 
will  bear,  within  a  comfortably  short  distance.     Furthermore, 
variable   costs  for  terminal  charges  have  to  be   considered. 
Wherever  they  are  high  the  rate  must  rise  at  once  sufl&ciently 
to  cover  these,  no  matter  how  short  the  distance;   but  there- 
after the  rate  may  not  need  to  be  increased  greatly  for  some 
time.     On  light  higher-grade  goods  the  wagon  is  an  effective 
competitor  for  longer  distances.^     Moreover,  the  competitive 
points  at  which  rates  rise  from  stage  to  stage  are  seldom  the 
same  for  all  classes  of  goods.     A  river  crossing  brings  com- 
petition for  coal,  lime,  or  cement,  but  does  not  affect  the  rates 
chargeable  on  high-class  freight  which  seldom  goes  by  water 
in  any  event.     A  railway  specially  interested  in  the  develop- 
ment  of  some  particular  industry,   wherever  it   crosses   our 
hypothetical  line,  effectively  holds  down  the  rate  on  the  prod- 
uct of  that  business.     Junction  points  with  other  railways 
having  no  such  interest  may  have  no  influence  upon  that  rate, 
but  may  cause  modifications  in  other  directions.    Another  rail- 

1  From  A.  B.  Stickney,  Railroad  Problems,  p.  69. 
*  Cf.  note  on  p.  375. 


110  RAILROADS 

way  being  in  need  of  back  loads  over  its  line,  as  the  result  of 
a  predominant  movement,  let  us  say,  of  beef  cattle  at  certain 
seasons  of  the  year,  may  introduce  competition  in  all  the  ton- 
nage capable  of  being  carried  on  cattle  cars.  Such  a  road  holds 
down  the  rates  on  this  traffic  wherever  it  happens  to  cross, 
but  has  no  effect  upon  any  other  rate.  Thus  it  comes  about 
in  practice,  as  the  last  diagram  well  illustrates,  that  the  tariff 
lines  cross  and  recross  one  another,  generally  rising  with  in- 
creasing distance,  but  at  all  sorts  of  different  times  and  places. 

Few  generalizations  are  possible  in  this  connection.  Rate 
maldng  must  in  a  growmg  country  ever  be  a  matter  of  infinite 
detail.  It  is  generally  true,  however,  that  beyond  a  certain 
point  the  tariff  on  different  grades  of  commodities  will  sepa- 
rate more  and  more  widely  with  increasing  distance.  For, 
obviously,  after  the  low-grade  goods  have  reached  the  maximum 
which  they  can  bear  —  and  this  they  tend  to  do  speedily  —  they 
must  remain  practically  constant;  while  those  of  higher  grade 
contmue  progressively  rising.  And  for  very  short  distances 
the  rate  on  the  low-grade  goods  may  even  exceed  that  imposed 
upon  higher-class  tonnage.  The  coal  rate  for  a  ten-mile  haul 
may  exceed  that  upon  some  commodity  worth  twice  as  much; 
but  for  a  200-mile  haul  the  coal  rate  may  be  only  one-eighth 
of  the  rate  on  the  other  goods.  Long  experience  on  the  part 
of  the  carriers  has,  however,  enabled  them  to  arrange  their 
tonnage  in  classes;  for  each  of  which  the  conditions  are  more 
or  less  uniform.  By  reserving  the  exceptional  traffic  for 
special  treatment  under  commodity  rates,  a  fairly  consistent 
scheme  of  charges,  rising  by  stages  with  increasing  distance 
may  be  evolved. 

Few  standard  railway  tariffs  in  the  United  States  develop 
beyond  the  point  covered  by  the  preceding  paragraph.  Many 
of  them  are  unable  even  to  reach  this  stage  of  logical  growth. 
In  the  South,  for  instance,  they  have  never  got  beyond  the 
stage  of  progressively  rising  local  rates,  with  independent  and 
often  radically  reduced  charges  at  all  large  towns  or  com- 


RATE  IvIAKING  PRACTICE  111 

petitive  points.^    Each  traffic  manager,  particularly  since  the 
effective  prohibition  of  working  agreements  between  compet- 
ing lines  by  the  Trans-Missouri  Freight  Association  decision 
of  the  Supreme  Court  in  1896,  has  been  left  to  work  out  his 
own  salvation,  not  aided  by,  but  in  spite  of,  the  efforts  of  his 
rivals.     There  is,  nevertheless,    one   example   of   further   de- 
velopment in  the  so-called  trunk  Une  territory,  lymg  east  of 
the  Mississippi  and  north  of  the  Ohio  and  Potomac  rivers. 
Conditions  here,  in  general,  are  most  favorable  by  comparison 
with  the  West  and  South.     Both  population  and  traffic  are 
dense,  and  the  state  legislatures  are  conservative  in  making 
grants  for  the  construction  of  new  lines.     The  companies  are 
historically   mature.      The    good   fruits    of    cooperation   had 
already  appeared  in  the  evolution  of  a  scientific  and  logical 
scheme,  long  before  such  cooperative  action  had  been  froTvnaed 
upon  by  the  law  and  the  courts.     All  the  railways  m  trunk 
line    territory  have    worked  in  harmony,   so  far  as    general 
classified  local  tariffs  are  concerned  —  however  much  they  may 
have  fought  one  another  over  differentials  to  seaboard  cities, 
or  export  and  import  rates.     Then  system  is  comparatively 
simple  in  principle,  although  it  has  required  the  experience 
of  many  years  to  work  out  in  detail.     Fully  described  else- 
where,2  it  will  suffice  for  present  purposes  to  say  that  all  rates 
from  intermediate  points  between  Chicago  and  New  York,  are 
fixed  at  a  definite  proportion  of  the  Chicago-New  York  rate 
both  for  east-  and  westbound  shipments.     Thus,  for  instance, 
as  shown  by  the  map  of  trunk  line  rate  distribution,  at  page  365, 
the  rate  from  Detroit  to  New  York  is  seventy-two  per  cent, 
of  the  Chicago-New  York  rate.     The  percentages  from  the 
following  points  are  as  indicated,  namely:   Cincumati,  eighty- 
seven  per  cent.;    Indianapolis,  ninety-three  per  cent.;    Grand 
Rapids,  ninety-six  per  cent.;  Peoria,  111.,  one  hundred  and  ten 
per  cent.;   Louisville,  Ky.,  one  hundred  per  cent.;   Milwaukee, 
one  hundred  per  cent.;    and  even  points  in  Canada,  such  as 
1  P.  380,  infra.  2  Chapter  X,  p.  360,  infra. 


112 


RAILROADS 


Toronto,  seventy-eight  per  cent.,  etc.  Every  place,  no  matter 
how  small,  has  a  certain  percentage  of  the  New  York-Chicago 
rate  assigned  to  it.  This  rate  changes  with  any  variation  of  the 
standard  or  basic  charge.  Thus  when  the  Chicago-New  York 
rate,  first-class,  is  seventy-five  cents,  the  rate  from  Indianapolis 
is  ninety-three  per  cent,  of  that  figure.  Any  change  of  Chicago- 
New  York  first-class  rates  modifies  every  intermediate  rate  in 
exactly  the  same  proportion.  This  was  well  exemplified  in  the 
rate  wars  of  1893.  These  percentages  have  been  fixed  after  a 
long  process  of  compromise  among  conflicting  interests.  An- 
other point  of  special  interest  is  that  these  rates  are  adjusted 
on  the  basis  strictly  of  the  long  and  short  haul  principle, 
namely,  that  all  intermediate  points  enjoy  a  somewhat  lower 
rate  than  the  terminal  points,  although  the  percentage  may 
not  be  exactly  upon  a  mileage  basis.  Consideration  of  the 
distribution  of  these  percentages  points  to  many  apparent 
inequalities  in  the  adjustment;  but,  as  a  matter  of  fact,  it  will 
be  found  that  the  existence  of  competing  routes,  of  water 
transportation  or  of  other  factors,  offers  a  partial  explanation 
in  most  instances. 

Such  being  the  general  character  of  this  comprehensive 
trunk  line  system,  the  relation  of  it  to  the  tariffs  described 
heretofore  is  not  difficult  to  demonstrate.  Each  separate 
railway  having  developed  a  well-ordered  rate  schedule,  they 
have  all  met  and  agreed  upon  a  unified  scheme;  which  as  far 


as  possible  harmonizes  all  conflicting  interests.  The  grada- 
tion of  rates  rising  with  increasing  distance  from  New  York 
on  each  separate  road,  is  adjusted  to  the  corresponding  grada- 
tion of  rates  of  its  neighbors  on  either  side.     The  result  is  a 


RATE  MAKING  PRACTICE  113 

series  of  rate  zones,  l>^ng  more  or  less  concentrically  about 
the  terminal  point.  These  zones  are  highly  irregular  in  ^vidth 
and  area,  but  possess  one  feature  in  common.  Each  remoter 
zone  is  one  stage  higher  in  rates  than  its  predecessor.  This 
relationship  is  indicated  by  the  cross  section  diagram  herewith. 
This  cross  section,  of  course,  differs  from  the  diagrams  hereto- 
fore showTi.  It  is  purely  geographical,  being  taken,  not  along 
one  single  railway  but  as  the  crow  flies  —  straight  across  the 
whole  trunk  line  territory.  But  in  order  to  appreciate  the 
significance  of  this  elaborate  scheme,  one  should  imagine  a 
whole  series  of  such  progressively  rising  rates,  radiating  out  along 
the  different  lines  of  railway.  Connecting  the  corresponding 
levels  or  stages  upon  each  one  with  those  of  its  neighbors,  the 
concentric  zones  are  immediately  outlined.  The  advantage  of 
such  a  broad  scheme  is  that  it  generalizes  the  single  line  tariff; 
taking  into  view  every  place,  no  matter  how  small  and  irre- 
spective of  its  location  whether  upon  a  through  line  or  merely 
a  local  transverse  one.  Every  towm,  no  matter  how  insignifi- 
cant, is  assigned  a  place  in  a  logically  evolved  plan.  Such 
would  seem  to  be  the  ideal  of  rate  construction,  toward  which 
all  traffic  managers  should  strive. 

The  foregoing  description  of  the  development  of  a  mileage 
tariff  is  applicable  to  only  a  part  of  the  traffic.  A  very  large 
volume  of  tonnage,  —  said  to  be  not  less  than  seventy-five  per 
cent,  in  America,  skty-three  per  cent,  in  Prussia  and  fifty  per 
cent,  in  the  United  Kingdom,  —  moves  under  special  rates 
made  in  quite  another  way  in  response  to  the  exigencies  of 
commercial  competition.  -  The  making  of  these  freight  rates  in 
practice  is  an  extremely  compficated  matter.  No  single  road 
is  independent  of  rates  made  by  its  rivals  —  rates  appHcable 
not  only  to  competing  commodities  and  markets,  but  also  as 
affected  by  apparently  the  most  remote  and  disconnected  con- 
tingencies. Thus  railway  rates,  as  has  well  been  said,  are  not 
a  set  of  independent  threads;   they  form  a  fabric.     They  are 


114  RAILROADS 

so  interwoven  everywhere  that  if  one  thread  be  shortened,  it 
will  cause  a  kink  in  the  fabric  that  may  run  almost  anywhere. 
In  order  to  understand  this  it  will  be  necessary  to  describe 
somewhat  in  detail  the  nature  of  competition  as  applied  to 
transportation;  and  then  to  show  by  a  few  concrete  illustra- 
tions, the  various  factors  which  actively  enter  into  the  deter- 
mination of  specific  rates.  Laymen  and  legislators  do  not 
sufficiently  appreciate  the  extremely  delicate  nature  of  the 
work.  Much  discussion  relative  to  railway  competition  seems 
to  be  based  upon  the  assumption  that  it  consists  in  the  main 
of  the  competition  of  railway  lines  more  or  less  parallel  or 
else  operating  under  substantially  hke  conditions.  As  a  mat- 
ter of  fact  competition  in  transportation  is  to  a  large  degree 
far  more  complex. 

Railway  competition  is  of  three  entirely  distinct  sorts. 
These  may  be  denominated,  respectively,  competition  of  routes, 
competition  in  facihties  and  competition  of  markets.^  The 
first  of  these,  competition  of  routes,  as  the  name  suggests,  is 
limited  to  the  activities  of  the  carriers  alone.  It  occurs  when- 
ever two  railways  are  exposed  to  identical  commercial  con- 
ditions both  at  the  point  of  origin  and  of  destination.  The 
rivalry  is  direct  and  physical.  The  only  competition  possible 
is  that  concerning  the  route  by  which  traffic  may  move  be- 
tween those  two  points.  Such  competition  is  most  likely  to 
arise  between  more  or  less  parallel  lines,  as  for  instance  be- 
tween the  various  trunk  roads  from  New  York  to  Chicago. 
The  classic  instances  in  our  history  are  of  the  rate  wars  due  to 
the  West  Shore  and  the  Nickel  Plate,  which  were  built  for  the 
express  purpose  of  engendering  competition  with  the  then 
existing  lines, —  the  New  York  Central  and  the  Lake  Shore, 
respectively.  The  same  sort  of  simple  competition  prevails,  of 
course,  between  a  railway  and  a  parallel  canal  or  other  waterway, 

1  The  voluminous  record  in  U.  S.  v.  Union  Pacific,  etc.  (The  Merger 
case),  U.  S.  Supreme  Court,  October  term,  1911,  No.  820  abounds  in  con- 
crete illustrations  of  all  three.     Cf.  esp.  Appellant's  Brief  of  Facts,  p.  34. 


RATE  MAKING  PRACTICE  115 

as,  for  instance,  between  the  Erie  canal  and  the  trunk  Unes, 
or  the  Illmois  Central  and  the  Mississippi  river.  Such  simple 
competition  as  this,  where  confined  to  railways  alone,  almost 
inevitably  leads  to  one  of  two  results:  the  roads  may  remain 
independent,  preventing  rumous  rate  wars  by  pooling;  or  else, 
as  a  result  of  long  contuiued  cut-throat  competition,  the  bank- 
rupt road  may  be  bought  up  and  merged  with  the  solvent  one. 
This  was  the  fate  of  the  old  New  York  and  New  England  rail- 
way, finally  purchased  by  the  New  Haven  system;  of  the  West 
Shore  and  Nickel  Plate  hnes;  and  of  the  Kansas  Pacific,  un- 
loaded on  the  Union  Pacific  by  Jay  Gould.  The  nature  of 
railway  competition  is  indeed  such  that  no  other  result  than 
consoHdation  or  pooling  can  ensue.  Weyl  is  right  m  his 
observation  that, —  "  Strictly  speaking,  permanent  competi- 
tion can  exist,  not  between  railroads  struggling  for  the  same 
traffic;  but  solely  between  those  railroads  which  have  no 
territory  in  common." 

This  first  form  of  competition  of  routes  or,  as  it  has  been 
called,  of  alternative  routes,  often  obtains  where  conditions  of 
competition  are  more  obscure  than  in  these  simple  instances 
above  named.  In  the  rivalry  for  the  imported  plate  glass  or 
crockery  traffic  between  the  trunk  Imes  and  the  Gulf  roads, 
the  competition  is  none  the  less  of  routes  between  Liverpool 
and  Chicago,  although  the  water  carriage  by  way  of  New 
Orleans  or  Galveston  is  so  much  more  roundabout.  Freight 
actually  moves  from  Boston  to  Chicago  by  a  line  1786  miles 
long,  via  Asheville,  N.  C,  while  the  direct  distance  is  only 
1004  miles.i  From  St.  Louis  to  Meridian,  Miss.,  is  512  miles 
by  direct  rail  line;  yet  traffic  may  move  over  2000  miles  going 
to  New  York  and  then  around.^  The  map  on  p.  271,  show- 
ing the  various  rail  and  water  lines  concerned  in  traffic  between 
New  York  and  the  little  town  of  Troy,  Ala.,  shows  how  wide- 
spread are  the  ramifications  of  competition  of  this  sort.     Mani- 

1  Senate  (Elkins)  Committee,  1905,  Digest,  App.  II,  p.  10. 

2  Cincinnati  Freight  Bureau  case,  1910,  p.  447. 


I 


116  RA.ILROADS 

fold  instances  of  such  roundabout  carriage  have  been  elsewhere 
described  in  full.^  They  differ  from  the  competition  of  parallel 
routes,  however,  in  the  important  regard  that  absorption  of 
the  long  lines  by  the  short  ones  becomes  both  physically  and 
financially  impossible.  Whenever  a  large  area  like  the  Pacific 
slope  is  devoid  of  manufactures,  and  wherever  the  source  of 
supplies  is  sufficiently  concentrated,  as,  for  instance,  in  the 
manufacture  of  agricultural  unplements  which  are  ahnost 
exclusively  made  in  or  about  Chicago,  we  still  have  to  do  with 
a  clear  case  of  competition  of  routes,  although  a  great  number 
of  carriers  may  participate  in  the  business.  When  molasses 
or  rice  are  only  to  be  had  from  New  Orleans,  the  centre  of  such 
business,  the  carriers  to  all  tributary  consuming  points  compete 
for  the  routing  of  it  over  their  o^vn  respective  fines.  These 
carriers  may  operate  either  by  land  or  sea  or  by  a  combination 
of  both;  and  they  may  transport  commodities  by  the  most 
roundabout  ways.^  The  determinant  feature,  however,  distin- 
guishing this  class  of  competition  is  neither  the  mode  or  carriage 
nor  its  length;  but  is  found  in  the  fact  that  the  commercial 
conditions  at  both  ends  of  the  line,  points  of  origin  and  destina- 
tion, are  identical  for  each  participant  in  the  business.  Direct 
competition  of  routes,  therefore,  has  to  do  with  pure  transporta- 
tion, —  the  creation  of  place  values,  —  and  this  being  the  case, 
the  relative  cost  of  service  is  always  a  factor  of  moment. 

Competition  of  facifities,  the  second  of  the  three  phases  of 
railway  competition  above  mentioned,  deals,  as  its  name 
implies,  not  at  all  Avith  the  rates  charged  but  with  the  facilities 
or  conveniences  afforded.  Such  competition  is  confined  solely 
to  rivalry  for  business  at  the  estabfished  rates.  Immediately 
on  the  appearance  of  any  departure  from  these  conditions  the 

1  Chapter  VIII,  infra.     Cf.  also  p.  255.    Which  Hne  has  the  advantage? 

2  Albert  Fink's  detailed  description  of  the  numberless  alternative 
routes  by  which  traffic  moved  into  the  South,  is  perhaps  one  of  the  best 
instances  in  print.  U.  S.  Reports  Internal  Commerce,  1876,  App.  pp. 
1-16.  The  Danville,  Va.,  case  is  an  admirable  instance.  8  Int.  Com. 
Rep.,  409;  reprinted  in  Railway  Problems,  chap.  XVI. 


RATE  MAKING  PRACTICE  117 

question  becomes  one  of  competition  of  either  of  the  other  two 
sorts.  An  instance  of  competition  of  faciUties  would  be  the 
introduction  of  reclining  chairs  or  of  a  superior  service  in  pas- 
senger business.  When  the  Rock  Island  system  offered  such 
facihties  without  an  extra  charge,  it  became  necessary  at  once 
for  others  to  meet  this  competition  in  the  same  way  that  they 
would  meet  a  reduction  of  rates.  Any  reduction  in  time  of 
transit  for  freight  business  between  two  given  points  without 
extra  charge,  would  in  the  same  manner  give  rise  to  competition 
of  facihties.  Such  facilities,  however,  as  might  have  a  distinct 
money  value,  as,  for  instance,  free  storage,  cartage,  demurrage 
or  milling-in-transit,  any  one  of  which  practically  amounts  to 
giving  value  without  charge,  are,  of  course,  equivalent  to  a 
reduction  of  the  rate;  and  do  not  belong  in  this  class  of  con- 
siderations at  all.  Only  those  conveniences  or  facilities,  which, 
while  attempting  to  secure  business  may  not  be  compounded 
for  money,  should  be  classified  in  this  group.  It  should  also  be 
observed  that  competition  of  facilities  may  as  readily  arise 
between  parts  of  the  same  railway  system  or  under  pooling 
agreements  to  maintain  rates,  as  between  distinct  and  inde- 
pendent companies.^  And  such  competition  between  parent 
and  child  often  arises.  Thus,  for  instance,  business  was  as 
actively  solicited  as' ever  by  the  Pennsylvania  and  the  Baltimore 
&  Ohio  in  competition  during  the  several  years  of  financial 
control  of  one  by  the  other  prior  to  1907.  The  New  Haven 
railway  may  compete  with  its  own  water  lines  around  Cape 
Cod  or  on  Long  Island  Sound.  But  in  all  of  these  instances  the 
cardinal  feature  to  note  is  that  the  competition  is  always  at  the 
established  rate.  For  New  England,  although  the  New  Haven 
system  and  the  Boston  and  Maine  do  not  compete  on  rates 
at  their  points  of  contact,  there  is  constant  rivalry  in  respect  of 
facilities  or  service.     The  same  thing  is  undoubtedly  true  of  the 

1  A  notable  instance  between  the  Southern  and  Union  Pacific  roads 
since  their  combination.  Described  fully  in  our  Railway  Problems,  rev., 
ed.,  chap.  XXII. 


118  RAILROADS 

Atchison  and  the  Southern  Pacific  in  the  carriage  of  Cahfornia 
fruits.  Although  operated  under  pooling  agreements,  yet  they 
were  competitors  in  the  matter  of  the  service  offered.  Each 
sought  an  enlarged  volmne  of  tonnage,  but  not  by  cutting  the 
agreed  rate. 

The  third  form  of  competition  in  transportation  is  dependent 
upon  the  competition  of  markets;  and  is  not  in  reality  direct 
competition  between  carriers  at  all.  This  is  the  most  difficult 
of  all  forms  to  understand. ^  It  is  certainly  in  many  cases  more 
than  a  "euphemism  for  railway  pohcy."  ^  Yet  although  in- 
direct and  often  obscure,  it  is  of  fundamental  and  conclusive 
importance  in  the  determination  of  freight  rates.  Commercial 
competition  deals  not  with  a  mere  choice  of  routes,  but  with 
alternative  markets.  The  carriers  act,  not  independently  and 
of  their  own  volition,  but  only  as  agents  or  representatives  for 
their  constituents,  the  shippers.  They  may  become  tools  or 
weapons  in  the  hands  of  merchants  or  manufacturers  who  are 
the  real  contestants.  It  is  largely  in  this  sense  that  it  is  so 
often  alleged,  and  rightfully,  that  railway  traffic  managers 
oftentimes  do  not  make  rates  at  all.  Their  energies  are  bent 
to  the  analysis  of  those  circumstances  by  which  their  rates  are 
made  for  them. 

The  production  or  preparation  of  commodities  for  final 
consumption  falls  naturally  into  two  distinct  parts;  the  crea- 
tion of  form  value,  succeeded  by  the  conferring  of  place  value. 
Transportation  is  concerned  alone  with  the  latter  process. 
Of  these  two  operations,  the  latter,  the  creation  of  place  values, 
is  by  far  the  more  elastic  and  adaptable  process.  The  grower, 
the  miner  or  the  manufacturer  has  his  first  costs  more  or  less 
rigidly  fixed  by  natural  or  human  conditions;  such  as  the  fer- 
tility of  the  soil,  the  grade  of  ore,  the  prevailing  scale  of  wages, 

1  Albert  Fink's  description  in  U.  S.  Reports  Internal  Commerce,  1876, 
App.  p.  38,  is  a  classic. 

2  Cf.  p.  621,  injra.    Also  the  dialogue  in  21 1.C.C.  Rep.,  356-359;  and 
Ibid.,  414. 


RATE  T^IAKING  PRACTICE  119 

and  so  on.  His  proximity  to  the  status  of  a  marginal  producer 
depends  upon  his  relative  position  in  these  respects.  With 
the  carrier,  matters  are  more  contingent.  Including  within 
its  reach,  as  it  does,  many  grades  of  producers  and  consumers, 
each  more  or  less  rigidly  held  bound  by  his  own  circumstances 
and  conditions,  as  above  said,  the  carrier  is  able  to  exercise  a 
wide  range  of  choice  in  fixing  that  margin  of  value  created  which 
it  reserves  for  itself.  And  at  all  times,  by  reason  of  the  factors 
set  forth  elsewhere,  primarily  its  subjection  to  the  law  of  in- 
creasing returns,  this  intermediate  share  of  the  carrier  tends  to 
adjust  or  accommodate  itself  to  the  end  that  it  may  discover  or 
produce  a  wider  margin  between  values  in  the  hands  of  producer 
and  consumer,  respectively.  This  may  be  best  accomplished 
by  a  progressive  widening  of  its  field  of  activities,  that  is  to  say, 
by  an  enlargement  of  its  physical  reach  and  scope.  It  is  always 
striving  to  lower  the  cost  of  production  made  by  the  marginal 
producer.  Its  motto  must  ever  be,  to  get  more  business,  if 
not  right  at  home  by  search  for  it  abroad  —  and  this  alwaj^s 
with  the  chance  that  the  greater  the  distance  between  the  pro- 
ducer and  the  consumer,  the  greater  the  possible  margin  of 
place  value  remaining  as  its  individual  share. 

This  ever-present  incentive  to  widen  the  m^arket  carries 
with  it  a  direct  consequence.  A  market  is  a  commercial  area 
characterized  by  a  prevalent  equality  of  prices.  Phenomenal 
development  in  this  respect  is  characteristic  of  the  United 
States.  For  many  commodities  the  market  is  coextensive  with 
the  national  domain.  It  is  the  chosen  function  of  transporta- 
tion agents,  by  rail  and  water,  to  ensure  this  result;  to  preserve 
an  equality  of  prices,  despite  the  variety  of  producing  and 
consuming  conditions.  The  railway  is  the  agent  by  which  the 
market  is  thus  widened  and  rivalries  are  thus  equalized.  In 
railway  parlance  this  is  what  is  knowTi  as  "keeping  everj^one  in 
business."  The  following  quotation  from  the  Senate  Com- 
mittee Hearings  of  1905  adequately  describes  the  process:  "I 
am  interested  in  the  erection  of  a  mill  that  has  just  been  com- 


120  RAILROADS 

pleted,  and  sometime  since  I  was  figuring  on  the  question  of  a 
smokestack.  I  wanted  to  have  that  stack  built  out  of  brick 
that  is  burned  in  New  Jersey,  and  that  is  several  hundred  miles 
away.  It  is  a  long  way  to  ship  freight  from  New  Jersey  to 
North  Carolina.  A  quotation  was  made  me  by  the  stack  builder, 
whose  office  is  in  New  York,  and  I  remarked  to  him,  'That 
price  is  prohibitive;  I  cannot  pay  that  price  for  that  stack.' 
He  said,  'That  is  the  best  I  can  do;  but  if  you  will  tell  me  what 
you  can  afford  to  pay  for  that  stack,  in  competition  with  home- 
burned  brick,  I  will  see  what  I  can  do  with  the  railway  people.' 
He  said,' All  right;  I  will  take  it  up  with  the  railway  people.' 
His  quotation  included  the  delivery  of  the  brick  and  the  erection 
of  the  stack  at  my  plant.  It  would  require  something  like 
about  fifty  carloads  of  brick  to  build  that  stack.  Within  a 
week  he  had  his  price  revised,  and  gave  me  a  satisfactory 
quotation  and  took  my  contract  for  the  stack.  Of  course  he 
had  to  get  a  special  rate  from  the  railway  people,  because  there 
is  no  regular  tariff  on  brick  from  New  Jersey  to  North  Carolina." 
In  this  instance  the  railways  actually  created  this  new  business 
by  so  adjusting  the  margin  between  the  minimum  cost  of  making 
brick  iu'New  York  and  in  North  Carolina,  as  to  make  it  possible 
for  the  traffic  to  move.  The  special  rate  here  mentioned, 
however,  should  be  carefully  distinguished  from  a  secret  rebate 
offered  to  one  contractor  as  against  another  in  the  same  place. 
This  commodity  rate,  while  special  to  meet  a  particular  con- 
tingency, was  open  to  any  other  shipper  similarly  circumstanced. 
The  student  cannot  too  carefully  discriminate  between  these 
two  sorts  of  special  rates.  They  are  constantly  confused  in  the 
public  mind.  The  effect  of  these  open  commodity  rates,  is 
not  to  create  difference  of  opportunity  between  individuals, 
but  to  generalize  economic  conditions  and  equalize  prices 
throughout  wide  areas. 

The  most  satisfactory  way  to  describe  commercial  com- 
petition as  applied  to  carriers  is  by  concrete  illustrations. 
There  are  two  distinct  varieties  or  degrees  of  it,  which  may 


RATE  MAKING  PRACTICE  121 

be  denominated  primary  and  secondary.  These  might  as 
properly,  perhaps,  be  called  simple  and  complex,  or  direct  and 
indirect.  Of  these,  the  first  concerns  those  cases  wherein  a 
commodity  undergoes  no  physical  transformation  between  pro- 
ducer and  consumer.  Shipments  are  usually  direct.  Only 
one  rate  is  involved.  Shall  St.  Louis  and  the  South,  for  ex- 
ample, be  supplied  with  salt  from  the  Kansas  or  Michigan 
fields?  ^  This  is  a  case  of  pure  transportation,  —  the  creation 
of  place  value,  alone.  The  Aroostook  farmers  of  Maine  com- 
pete in  prices  with  the  potato  growers  of  Michigan  in  the  New 
York  market.  Each  district  is  usually  represented  by  a  rail- 
way, dependent  upon  the  prosperity  of  its  particular  constitu- 
ency. Competition  of  markets  is  usually  more  keen  where  a 
number  of  carriers  are  concerned,  each  representing  its  own 
clients;  but  it  may  conceivably  arise  as  between  several  markets 
served  by  the  same  company,  especially  with  the  growth  of 
great  railway  systems.  The  Southern  Pacific  must  insure  a 
rate  from  CaHfornia  on  oranges  to  eastern  markets,  as  com- 
pared \vith  the  rates  over  the  southern  roads  from  Florida, 
sufficiently  low  to  warrant  the  venture  of  capital  in  the  industry.^ 
Marble  from  the  quarries  of  Vermont  and  North  Carolina,  and 
paving  blocks  from  the  Lithonia  district  in  Georgia  and  from 
Wisconsin  or  South  Dakota,  must  meet  in  Chicago  on  even 
terms.  Such  competition,  although  simple  and  direct,  recog- 
nizes no  national  bounds.  Copper  from  Montana  must  be 
laid  down  in  Liverpool  at  rates  to  permit  of  meeting  the  price 
on  Chili  bars  from  South  America.  Our  entire  grain  and  cotton 
crops  must  be  transported  at  rates  which  will  enable  them  to 
hold  their  own  in  European  markets.  The  California  raisin  has, 
in  this  manner,  had  to  make  its  way  into  Eastern  markets  m 
the  United  States  against  the  pressure  of  importations  from 
Spain,  as  described  in  another  place.^  The  cotton  mills  in  New 
England  and  in  the  South  must  have  their  output  carried  to 

1  5  I.C.C.  Rep.,  299;  or  22  Idem,  407.  Reprinted  in  Railway  Problenas. 

2  14  I.C.C.  Rep.,  476.  '  P.  178,  infra. 


122  RAILROADS 

China  under  conditions  which  will  enable  them  to  meet  the 
price  made  by  the  British  manufacturer.  This  last  instance, 
however,  introduces  us  to  the  second  form  of  competition; 
inasmuch  as  a  double  transportation  is  involved  first  from  the 
fields  to  the  mill,  and  thereafter  from  the  mill  to  the  consumer. 
Secondary  or  indirect  forms  of  commercial  competition  in 
transportation,  concerning,  as  has  been  said,  not  one  but  two 
distinct  carriages  of  entirely  different  goods,  needs  to  be 
in  turn  subdivided  still  further.  The  products  of  agriculture 
and  mines  afford  the  best  instances.  The  lumber  business  is 
peculiarly  suggestive  in  this  connection,  owing  to  the  fact 
that  in  the  United  States  a  vast  treeless  area  in  the  Middle 
West  is  surrounded  with  forest  tracts  available  for  develop- 
ment. The  market  again  in  this  case  is  limited  only  by  our 
national  frontier.  Omaha  is  supplied  with  yellow  pine  and 
cypress  from  Louisiana  after  a  1,200-mile  haul;  Oregon  fir 
brought  1,800  miles  in  each  mstance  for  fifty  cents  per  hundred 
pounds;  and  with  Michigan  hemlock  and  pine  transported 
less  than  500  miles  for  eleven  and  a  half  cents.  These  various 
sorts  of  lumber  are  all  more  or  less  competitive.  And  in  each 
case  the  final  cost  of  laying  down  the  product  m  Omaha  is 
determined;  first,  by  the  rate  from  the  stump  to  the  mill,  and 
then,  as  sawed  lumber,  thence  on  to  destination.  The  Eau 
Claire,  Wisconsin,  lumber  case  ^  before  the  Interstate  Com- 
merce Commission,  fully  describes  the  intricacies  of  adjustment 
needed  to  hold  a  number  of  such  producers  on  a  parity.  In 
this  instance  Eau  Claire,  "next  the  stump,"  as  an  important 
lumbering  centre  was  sho%vn  to  be  declinmg  in  importance  rela- 
tively to  Mississippi  river  towns,  which  received  their  logs  by 
raft  down  stream.  A  differential  of  a  few  cents  was  threatening 
the  welfare  of  a  considerable  population.  The  Wichita,  Kansas, 
cases  are  suggestive  in  a  similar  way.^  Sugar  is  laid  down  at 
this  market  from  every  point  of  the  compass.     From  Hawaii 

•  5  I.C.C.  Rep.,  264;  reprinted  in  our  Railway  Problems. 
^  Discussed  on  p.  232,  infra. 


RATE  MAKING  PRACTICE  123 

it  is  shipped  in  the  raw  state  to  San  Francisco,  and  then  brought 
East,  Uke  the  Oregon  lumber,  cheaply,  as  a  backload  to  counter- 
balance westbound  shipments  of  grain  and  manufactures. 
From  New  Orleans  refineries  comes  the  Louisiana  product,  and 
from  the  Atlantic  sea  ports  the  Cuban  sugar;  but  in  each  case 
the  carriage  is  broken  at  an  intermediate  point,  at  which  manu- 
facture or  jobbing  ensues.  A  large  class  of  operations  analogous 
to  this,  known  as  "milling  in  transit"  and  "floating  cotton," 
elsewhere  described  in  detail,  involve  the  same  complexity 
and  inter-relation  of  rates.  ^  The  point  to  carry  forward  is  that 
commerical  competition  demands  that  in  every  case  not  single 
rates  but  the  sums  of  all  the  connecting  rates  for  each  competing 
person  or  region  shall  be  i^roperly  adjusted.  If  this  be  not 
done,  some  one  will  be  excluded  from  the  market  and  "put 
out  of  business." 

By  this  time  in  our  ascending  scale  of  complexities,  it  will 
be  observed  that  manufacture  now  begins  to  outweigh  mere 
transportation  in  importance.  With  low-grade  products,  hke 
salt  or  sugar,  the  increment  of  value  due  to  transportation 
is  relatively  high  as  compared  with  manufacturing  costs.  As 
the  grade  of  product  rises,  however,  the  differences  in  value 
and  in  form  between  the  raw  and  the  finished  product,  render 
the  problem  of  location  of  the  manufacture  more  difficult  as 
affected  by  the  relative  adjustment  of  rates  of  transportation 
for  the  two.  According  to  the  data  of  the  Federal  Bureau 
of  Corporations,  the  cost  of  refining  crude  petroleum,  worth 
three  to  four  cents  a  gallon  at  the  wells  in  Pennsylvania, 
should  not  exceed  one-half  cent  a  gallon.  This  sum  would 
barely  pay  for  the  first  hundred  miles  of  its  carriage  by  rail, 
as  ordinarily  shipped.  The  market  is,  of  course,  extraordinarily 
extensive;  hence  the  persistent  flagrancy  of  the  practices  of 
secret  rebating  by  the  Standard  Oil  Co.^  To  obtain  such 
special  favors  in  transportation  outweighed  in  importance  the 
incentive  to  introduce  economies  in  production.  In  this  in- 
1  Chapter  IX.  2  Details  in  chap.  VI. 


124  RAILROADS 

dustry,  where  little  waste  occurs  in  manufacture,  the  refineries 
may  well  be  located  at  the  consumers'  door.  The  manufacture 
of  furniture  for  the  Pacific  states,  on  the  other  hand,  must  be 
located  "next  the  stump,"  in  North  CaroUna  or  New  England. 
The  long  carriage  must  be  appUed,  not  to  the  bulky  lumber 
but  to  the  finished  product.  The  freight  rate  on  lumber  from 
Oregon  to  Pittsburg  is  just  about  equal  to  the  value  of  the 
logs  at  the  mill.  Obviously,  the  large  proportion  of  waste  or 
common  lumber  will  not  bear  a  high  addition  to  its  cost  by 
carriage  to  any  distance.  In  the  manufacture  of  fur  hats  a 
shrinkage  of  weight  occurs  of  one-half  between  the  fur  scraps 
and  the  finished  product.  In  such  a  case  it  is  imperative,  either 
that  the  factory  be  near  the  source  of  supply  or  that  the  rate 
on  the  two  distinct  commodities  be  nicely  adjusted.  The 
decision  of  the  United  States  Steel  Corporation  to  build  a  large 
plant  at  Duluth  for  supplying  the  northwestern  market  is  the 
outcome  of  such  considerations.  The  main  point  is  that 
the  adjustment  of  a  number  of  rates  may  determine,  not  only  the 
general  welfare  of  the  industry  but  even  its  specific  geographical 
location  with  reference  to  the  raw  material  on  the  one  side  and 
the  market  on  the  other. 

The  jobbing  or  wholesale  business  of  the  United  States  ex- 
emplifies the  most  highly  involved  and  complex  details  of  com- 
mercial competition.^  In  this  field  it  appears  most  clearly  that, 
as  is  so  often  alleged,  railway  traffic  managers  hold  the  welfare 
of  entire  communities,  as  it  were,  in  the  palms  of  their  hands. 
In  all  the  cases  heretofore  cited,  great  natural  forces  outweighed 
the  purely  personal  and  human  ones.  Soil,  climate  and  mineral 
resources  more  or  less  completely  determined  the  final  outcome 

1  Cf.  Carload  Minimum  in  chap.  IX  and  the  Texas  system  on  p.  393, 
infra. 

The  following  cases  best  illustrate  these  principles:  Burnham,  Hanna, 
Munger,  etc.,  14  I.C.C.,  299;  and  20  Idem,  141;  later  in  218  U.  S.  Rep., 
88.  (P.  442,  infra.)  Greater  Des  Moines  Committee,  14  Idem,  294. 
Indianapolis,  Kansas  City  and  Fort  Dodge,  16  Idem,  57,  195,  and  572. 
Warnock,  21  Idem,  546  and  23  Idem,  195.  St.  Louis  Business  Men's 
League,  9  Idem,  318.     And  the  Wichita  cases  in  chap.  VII,  p.  232,  infra. 


RATE   MAKING    PRACTICE  125 

of  commercial  competition.  But  the  distributive  business  of  a 
country  is  more  largely  artificial.  It  is  more  subject  to  human 
control,  and  may  be  influenced  by  personal  considerations. 
Shall  the  economically  dependent  southern  planter  be  supplied 
with  manufactures  of  all  sorts,  —  from  harnesses  to  tin  dippers 
—  from  mid-western  cities  like  Cincinnati  and  Chicago  or 
from  eastern  centres,  such  as  New  York  and  Baltimore?  This 
is  the  underlying  economic  issue  raised  in  the  notable  Cin- 
cinnati Freight  Bureau  Case  in  1894;  in  the  course  of  whose 
determination  the  Supreme  Court  of  the  United  States  raised 
the  more  immediate  and  pressing  question  of  the  authority  of 
the  Interstate  Commerce  Commission  to  regulate  rates  at  all. 
In  the  dust  raised  by  the  controversy  over  this  purely  legal 
question,  the  basic  economic  dispute  was  lost  to  view.^  Shall 
the  people  of  the  Pacific  slope  be  supplied  with  hardware  and 
analogous  products  from  their  own  large  cities  which  buy  at 
wholesale  from  the  East,  break  bulk  at  San  Francisco  or  Seattle 
and  ship  out  to  smaller  to"WTis  in  less  than  carload  lots;  or  shall 
the  distribution  take  place  at  the  hands  of  jobbing  houses  located 
several  thousand  miles  away  at  Chicago  or  St.  Louis?  This  is 
the  economic  dispute  raised  in  the  St.  Louis  Business  Men's 
League  case.-  The  very  existence  of  San  Francisco  as  a  com- 
mercial centre  may  depend  upon  it.  For  the  primary  and 
secondary  operations  of  commerce  are  often  complementary. 
At  the  large  cities,  concentration  of  raw  staples  moving  inward 
naturally  entails  back  loads  outward  at  low  rates  for  manu- 
factured goods  distributed  by  jobbers.  Or,  taking  the  smaller 
places,  the  farmer  will  of  necessity  buy  his  cotton  cloth,  sugar 
and  coal  in  the  towTi  to  which  he  drives  by  wagon  to  deliver  his 
cotton,  corn  or  wheat. ^ 

The  entire  puzzling  class  of  cases  dealing  with  the  southern 


^  Pp.  248,   392,  and  588.     Both  cases  are  reprinted  in  our  Railway 
Problems. 

2  Pp.  125,  241,  398.     Also  in  Railway  Problems. 
3 1.C.C.  Rep.,  No.  861;  decided  Aug.  23,  1906. 


126  RAILROADS 

basing  point  system  are  primarily  concerned  with  such  issues 
as  these. ^  Three  distinct  classes  of  cases  arise.  There  is,  first, 
the  competition  between  cities  of  equal  size,  be  they  large  or 
small,  such  as  Memphis,  Tenn.,  and  Little  Rock,  Ark. ;  Danville, 
Va.,  and  Lynchburg;  or  Cleveland,  and  Cincinnati,  Ohio:  sec- 
ondly, the  rivalries  between  large  cities  and  what  may  be  called 
secondary  local  centres  in  the  same  part  of  the  country,  — 
such  as  Seattle,  Wash.,  v.  Spokane;  Chicago  v.  Burlington  or 
Dubuque,  Iowa;  or  Atlanta,  Ga.,  v.  Macon:  and  thirdly, 
the  intense  rivalries  between  the  great  first-class  cities,  like 
New  York,  Philadelphia,  and  Chicago,  and  the  rest  of  the  field, 
big  and  little. ^  The  mail  order  houses,  the  express  business 
and  the  parcels  post  intervene  at  this  point.  But  in  all  of 
these  issues,  series  of  no  less  than  three  separate  transportation 
costs  have  to  be  totalized  and  kept  more  or  less  on  a  parity. 
The  intricacy  is  increased  by  reason  of  the  fact  that  shipments 
must  be  made,  first  at  wholesale  to  the  jobbers,  and  thereafter 
usually  in  less-than-carload  lots  to  retailers.  If  the  carload 
rate  be  relatively  too  low,  with  reference  to  the  rate  on  small 
lots,  the  jobbers  near  the  market  will  be  upbuilt  and  the  jobbers 
at  a  distance  cannot  compete.  If  the  opposite  relation  obtains, 
the  jobber  in  a  distant  great  city  will  be  able  to  ship  out  small 
orders  cheaper  than  the  local  dealer  can  obtain  them  by  carload 
and,  breaking  bulk,  peddle  them  from  his  own  towTi.  So  narrow 
is  the  margin  of  profit  on  staple  goods  that  a  difference  of  a 
fraction  of  a  cent  per  pound  may  exclude  a  dealer  from  the  field 
entirely.  This  question  of  carload  ratings  is,  however,  treated 
elsewhere;  impinging,  as  it  does  upon  matters  of  freight  classi- 
fications.' 

The  rivalries  of  jobbers  and  middlemen  in  different  cities 
arc  inevitably  borne  into  the  offices  of  traffic  managers.  Were 
all  railways  equally  interested  in  all  cities  alike,  the  matter 
need  not  go  further,  engendering  railway  rivalries.     But  such 

1  Chapters  VII  and  XI.  *  Read  testimony  on  p.  278,  infra. 

'  P.  325,  infra. 


RATE  MAKING  PRACTICE  127 

is  seldom  the  case.  Hardly  a  road  can  be  named,  whose  in- 
terests are  not  more  or  less  identified  with  some  particular 
city.  Commercial  rivalry  thus  at  once  leads  to  railway  com- 
petition. Four  or  five  railways,  like  the  Chicago  and  North- 
western, radiate  out  to  the  west  from  Chicago,  and  have  no 
interest  in  St.  Louis.  Almost  as  many,  like  the  Missouri 
Pacific,  go  out  from  St.  Louis  without  entering  Chicago. 
Others,  Uke  the  old  Union  Pacific  and,  formerly,  the  Atchison 
system,  only  come  to  the  Missouri  river,  and  consequently 
wish  to  upbuild  their  eastern  termini,  Omaha  or  Kansas  City. 
Only  a  few,  hke  the  Illinois  Central,  reach  them  all.  Such  a 
road  is  usually  called  upon  to  act  as  a  mediator  in  all  dis- 
putes. "It  is  a  continual  struggle  between  the  line  from 
Kansas  City  to  St.  Louis  with  no  interest  in  Chicago,  and 
the  line  from  Kansas  City  to  Chicago  wdth  no  interest  in  St. 
Louis,"  as  one  witness  before  the  Industrial  Commission 
phrases  it.  Compromise  is  the  only  outcome.  And  in  this 
manner  an  involved  structure  of  differentials  is  built  up,  often- 
times top  heavy  and  always  susceptible  of  collapse  on  the 
defection  of  any  party  to  the  agreement.  When  a  truce  was 
patched  up  between  the  trunk  lines  and  the  Gulf  roads  after 
the  sugar  rate  war  of  1905,  it  is  said  to  have  taken  twenty 
experts  three  entire  days  merely  to  "line  up"  rates  on  a  parity 
between  the  competing  jobbing  centres. 

The  simplest  compromise  in  any  dispute  over  rates  between 
competing  centres  is  the  concession  of  absolute  equality  or,  ; 

as  it  is  called,  of  flat  rates  between  all  points  irrespective  of 
distance.      This  shifts  the  burden  from  the  carriers  and  places  j 

competition  entirely   upon  the   shoulders  of    the  merchants.  ( 

Oddly  enough,  also,  this  result  of  equal  rates  regardless  of  ( 

distance  between  various  competing  centres,  especially  when  \ 

they  are  secondary  distributing  or  concentrating  points  rather  '. 

than  original  sources  of  traffic,  may  sometimes  evolv3  naturally 
out  of  commercial  conditions  imposed  by  tariffs  built  up  upon 
the  basis  of  distance.     The  accompanying  theoretical  diagram, 


128 


RAILROADS 


based  upon  actual  traffic  conditions  prevalent  in  Missouri  river 
territory,  serves  to  illustrate  the  way  in  which,  under  certain 
circumstances,  such  equalization  of  rates  may  take  place. 
Two  groups  of  cities  are  here  represented  as  though  lying  re- 
spectively along  two  river  valleys  north  of  their  separation  at  a 
point  G.  Let  us  call  them  the  Mississippi  and  the  Missouri 
for  purposes  of  identification.  The  starting  point  is  equality 
of  rates  from  such  a  distant  point  as  New  York  (0)  to  all  places 
along  the  Mississippi  from  A  to  G.     Such  equality  properly 


arises  in  theory  from  the  substantially  equal  distance  from  New 
York.  In  practice  also,  under  the  trunk  line  rate  system,  ^ 
such  equality  prevails,  inasmuch  as  the  rates  from  New  York 
to  such  a  series  of  Mississippi  river  crossings  is  fixed  at  125  per 
cent,  of  the  rate  from  New  York  to  Chicago.  By  a  similar 
course  of  reasoning,  namely,  the  approximately  equal  distance 
from  New  York  (O),  rates  from  that  place  to  a  second  series  of 
points  along  the  Missouri  river  should  be  and  are  in  effect  made 
equal.  From  these  two  facts  it  logically  follows  that  the 
balances  of  the  rates  from  all  points  on  the  Mississippi  river  out 
along  an  extension  of  their  lines  from  New  York  toward  the 
west  should  also  be  equal.  This  is  obviously  in  conformity 
with  the  mathematical  principle  that  equals  subtracted  from 

1  Described  in  chap.  X. 


RATE    MAKING    PRACTICE  129 

equals  leave  equal  balances.  Thus  the  rates  B  X,  D  Y  and 
F  Z  are  compelled  to  equality.  From  this  relationship  in  turn 
follows  still  another.  All  rates  from  any  point  on  the  inner 
series  of  towns  to  any  point  whatsoever  on  the  outer  western 
series  of  places  along  the  Missouri  river  must  remain  equal 
regardless  of  distance.  For  each  line  from  New  York  to  A, 
B,  C,  D,  etc.,  wishes,  of  course,  to  participate  in  business  not 
only  on  the  direct  extension  of  its  own  line,  but  to  as  many 
other  points  as  possible.^  Without  some  agreement,  however, 
it  would  normally  enjoy  traffic  only  on  the  direct  extension  of 
its  o"v\Ti  fine.  The  point  Y  would  most  naturally  be  reached 
by  way  of  C,  D  or  E,  over  the  shortest  routes.  Competitors 
on  either  side  would  similarly  enjoy  an  advantage  in  more 
direct  lines  from  New  York  to  the  places  immediately  beyond 
them.  Thus  for  business  from  New  York  to  Z,  the  more 
direct  lines  through  E,  F  or  G  would  obviously  have  an 
advantage  over  lines  which  passed  around  through  A,  B,  C 
or  D.  An  almost  irresistible  incentive  to  cut-throat  com- 
petition would  exist.  The  only  way  the  lines  east  of  the 
inner  circle  can  peaceably  partition  business  to  the  outermost 
western  points  is  by  an  agreement  to  make  all  rates  between 
the  inner  and  outer  circles  the  same.  In  this  manner  the 
rates  from  A  to  Z  or  from  G  to  X  are  reduced  to  an  equality 
with  the  rates  offered  by  the  shortest  route  between  the  two 
rivers,  which,  in  this  case,  is  E  Z.  The  rate  for  this  shortest 
line  then  becomes  the  basic  one,  upon  which  all  the  others 
depend. 

The  foregoing  economic  reasoning  underlies  the  actual  tariff 
system  prevailing  in  what  is  known  as  Missouri  river  terri- 
tory.2  Two  great  streams  separating  at  St.  Louis  form  the 
eastern  and  western  boundaries  of  Missouri  and  Iowa.  All 
along  the  two  edges  of  these  states  are  located  important  river 

1  Procedure  is  described  at  p.  282,  infra. 

2  Admirabty  described  in  Annals  Amer.  Acad.  Pol.  Science,  April  11, 
1908;    reprinted  in  our  Railway  Problems,  rev.  ed.,  Chap.  XA. 

VOL.  I — ^9 


130 


RAILROADS 


cities,  each  of  which  has  more  or  less  direct  communication 
with  every  other  crossing  on  the  other  river,  over  a  comph- 
cated  system  of  interlaced  lines.  There  are  no  physical  bar- 
riers, the  country  being  plain  and  open.  The  starting  point  and 
basis  of  the  whole  scheme  is  the  shortest  direct  distance  be- 
tween the  two  nearest  points,  namely  Hannibal  on  the  Mis- 
sissippi, and  St.  Joseph  and  Kansas  City  on  the  Missouri. 
The  situation  is  shown  by  the  map  herewith.     At  these  points 


St.Jdeeph, 
Atchison 
Leavenworth 

Kansas  City" 


Traffic  Conditions  in  Missouri  River  Territory 


the  two  rivers  are  approximately  two  hundred  miles  apart. 
For  this  distance  the  base  rate  of  sixty  cents  per  hundred  pounds, 
first  class,  is  fixed  by  common  agreement.  Were  local  business 
only  to  be  considered,  and  were  the  railways  not  competing, 
the  rate  between  other  points  on  the  two  rivers  at  greater  dis- 
tances apart,  such  as  for  instance,  Burlington  on  the  Mississippi 


RATE    MAKING   PRACTICE  131 

and  Omaha  on  the  Missouri,  might  be  determined  on  a  relative 
distance  basis,  as  in  trunk  hne  territory.  But  the  commercial 
fact  is  that  a  large  proportion  of  the  business  between  all  these 
points  consists  of  long-distance  traffic  from  the  eastern  sea- 
board which  may  cross  the  Mississippi  at  any  one  of  these 
gateways  between  Dubuque  and  St.  Louis  on  its  way  to  the 
cities  on  the  Missouri  river.  All  of  these  through  long-distance 
shipments  must,  of  course,  enjoy  the  same  competitive  rate  to 
the  ultimate  western  destination  on  the  Missouri  river.  And, 
inasmuch  as  the  rate  from  the  east  to  the  Mississippi  crossings 
is  everj^'here  the  same,  namely  125  per  cent,  of  the  New  York- 
Chicago  rate,  it  follows  that  the  balance  of  the  rate  from  these 
points  on  to  the  Missouri  river  across  Iowa  and  Missouri, 
irrespective  of  distance,  must  likewise  be  the  same.  In  other 
words,  the  rates  between  all  these  Mississippi  and  Missouri 
river  points  must  be  equahzed,  irrespective  of  the  length  of  the 
intervening  route,  whether  it  be  two  hundred  miles  by  the 
shortest  direct  line  from  Hannibal  to  Kansas  City  across  Mis- 
souri, three  hundred  and  fifty  miles  from  Burlington  to  Omaha 
across  Iowa,  or  even  seven  hundred  miles  by  the  roundabout 
line  of  the  Illinois  Central  skirting  both  states.  In  brief, 
every  railway  which  touches  both  rivers,  however  circuitous 
its  route,  is  compelled  to  quote  the  same  rate  from  every  point 
on  the  Mississippi  river  to  every  other  point  on  the  Missouri. 
This  rate  must  be  the  one  fixed,  as  already  described,  for  the 
shortest  direct  line,  namely  sixty  cents  per  hundred  pounds 
first  class.  Furthermore,  in  precisely  the  same  way  that  these 
rates  to  Missouri  river  points  from  the  eastern  seaboard  are 
built  up  and  equalized,  the  rates  from  Chicago  to  the  same 
Missouri  river  points  must  be  kept  even.  The  rate  through 
from  any  one  of  the  long  chain  of  Mississippi  gateways  must 
be  the  same  irrespective  of  distance.  This  figure,  by  common 
agreement,  has  for  many  years  been  twenty  cents  per  hundred 
pounds  higher  than  the  rate  across  Illinois  to  the  Mississippi 
river  gateways  from  Chicago  alone.     The  dominant  note  of 


132  RAILROADS 

this  whole  tariff  is  equaUzation  of  rates  between  all  points  in 
competition  with  one  another  over  all  possible  routes.  Freight 
thus  moves  freely  in  every  direction  and  all  markets  are  held 
on  an  absolute  parity.  ^  It  is  one  of  the  most  remarkable 
features  of  American  commercial  organization,  this  practical 
elimination  of  the  element  of  distance  from  interstate  trade 
over  wide  areas. 

The  possible  evil  lurking  in  too  widespread  an  acceptance 
of  the  principle  of  the  flat  rate  is  clearly  apparent  in  the  reason- 
ing of  the  Eau  Claire,  Wisconsin,  lumber  case.^  This  town 
complained  of  the  disability  under  which  it  labored  in  shipping 
lumber  to  Missouri  river  points  by  comparison  with  other 
places  round  about.  It  appeared  in  the  evidence  that  as 
early  as  1884,  under  arbitration,  all  the  rates  from  competing 
centres  had  been  adjusted  on  the  basis  of  differentials;  and 
that,  as  interpreted  by  the  carriers,  the  purpose  of  these  dif- 
ferentials was  to  even  up  the  differences  between  competing 
towns;  to  the  end  that  all  manufacturers  should  be  put  upon 
an  equality  in  the  consuming  territory.  But  this  necessarily 
involved  the  practice  of  penalizing  or  nullifying  in  a  way  the 
advantages  of  location.  "If  Eau  Claire  could  produce  lumber 
cheaper  than  Winona  or  La  Crosse,  then  the  latter  points  were 
to  have  a  lower  rate  in  order  to  enable  them  to  compete." 
This  practice  the  Interstate  Commerce  Commission  condemned 
at  that  time;  and  it  has  consistently  adhered  to  the  precedent 
then  laid  down.  Obviously,  any  other  general  course  of  action 
would  be  analogous  to  hobbhng  the  fleetest  horse  in  a  race  to 
bring  him  down  to  the  rate  of  progress  of  the  slowest  laggard. 
The  principle  of  the  handicap  applied  within  moderate  limits 
makes  for  an  exciting  athletic  contest;  but  if  it  be  overdone,  it 
eliminates  all  interest  from  the  contest  whatever.  The  race 
becomes  one,  not  of  skill  or  endurance  in  running,  but  of 
securing    a    sufficiently    liberal    handicap.      Competition    to 

>  Similarly  in  the  South,  p.  246;  and   also  Texas  rates  on  p.  393. 
25  I.C.C.  Rep.,  264;  reprinted  in  Railway  Problems,  chap.  VIII. 


RATE    IVIAKING    PRACTICE  133 

be  of  advantage  in  the  way  of  progress  must  always  have 
in  view  the  survival  of  the  fittest  and  the  elimination  of  the 
unfit. 

The  vast  extent  of  the  United  States,  the  necessity  of  trans- 
porting commodities  great  distances  at  low  cost  and  the  pro- 
gressiveness  of  railway  managers,  has  led  to  an  extraordmary 
development  of  the  phase  of  rate  making  above-mentioned. 
The  principle  of  the  flat  rate,  based  upon  the  theory  that 
distance  is  a  quite  subordinate,  if  not  indeed  entirely  negligi- 
ble, element  in  the  construction  of  freight  tariffs  under  cir- 
cumstances of  competition,  was  fully  accepted  twenty-five 
years  ago.^  J.  C.  Stubbs,  traffic  manager  of  the  Harriman 
fines,  speaking  of  transcontinental  business  in  1898,  clearly 
expressed  it  as  "the  traditional  policy  of  the  American  lines  as 
between  themselves  to  recognize  and  to  practise  equafity  of 
rates  as  the  only  reasonable  and  just  rule  .  .  .  regardless  of  the 
characteristics  of  their  respective  Imes,  whether  equal  in  length 
or  widely  different."  It  is  the  theory  upon  which  the  southern 
basing-point  system  is  founded;  and  it  is  the  common  practice 
in  making  rates  into  and  out  of  New  England  —  being  in  fact 
vital  to  the  continued  prosperity  of  this  out-of-the-way  terri- 
tory.- President  Tuttle,  of  the  Boston  &  Maine,  has  most 
ably  supported  this  principle  of  equality  of  rates  irrespective 
of  distance.  "It  is  the  duty  of  transportation  agents,"  he 
says,  "to  so  adjust  their  freight  tariffs  that,  regardless  of 
distance,  producers  and  consumers  in  every  part  of  this  country 
shall,  to  the  fullest  extent  possible,  have  equal  access  to  the 
markets  of  all  parts  of  this  country  and  of  the  world,  a  result 
wholly  impossible  of  attainment  if  freight  rates  must  be  con- 
structed upon  the  scientific  principle  of  tons  and  miles."  This 
is  the  principle  of  the  blanket  rate  attacked  in  the  famous 

1  Theoretical  explanation  of  the  flat  rate  is  offered  in  Chapters  I 
andX. 

2  Best  described  in  McPherson,  Railroad  Freight  Rates,  1909,  pp. 
67-70.  The  bitter  opposition  by  New  England  senators  in  1910  to  amend- 
ment of  the  long  and  short  haul  clause  is  thus  explained. 


134  RAILROADS 

Milk  Producers'  Protective  Association  case  in  1897;  ^  and  it 
is  tiie  practice  which  has  been  so  fully  discussed  of  late,  as 
generally  applied  to  lumber  rates  from  the  various  forest  regions 
of  the  United  States  into  the  treeless  tract  of  the  Middle  West. 
The  principle,  while  applied  thus  generally  ui  the  construction 
of  tariffs,  is  of  far  greater  applicability  in  the  making  of  special 
or  commodity  rates.  Wool  rates  afford  one  of  the  best  ex- 
amples. Under  such  rates  the  bulk  of  the  tonnage  of  American 
railways  is  at  present  moved.  The  essential  principle  of  such 
special  rates,  constituting  exceptions  to  the  classified  tariffs, 
is  that  of  the  flat  rate;  namely,  a  rate  fixed  in  accordance  with 
what  the  traffic  will  bear,  without  regard  to  the  element  of 
cost,  that  is  to  say,  of  distance.  But  a  noticeable  trend  away 
from  the  flat  rate  is  evident  in  recent  decisions  of  the  Interstate 
Commerce  Commission;  especially  in  the  Intermountain  case,^ 
revision  of  the  wool  and  cattle  rates,  ^  and  the  general  disposi- 
tion to  lessen  special  tariffs  all  along  the  line. 

The  intricacy  of  freight  rate  adjustment  in  response  to 
the  subtleties  of  commercial  competition  depends  only  in  small 
measure  upon  the  absolute  freight  rate  imposed.  The  main 
problem  is  really  that  of  relativity.  But  this  does  not  mean 
mere  relativity  as  between  directly  competing  commodities 
or  places.  A  strict  relativity  based  upon  commercial  condi- 
tions must  often  obtain  as  well  between  the  rates  on  raw  ma- 
terials and  their  own  finished  products;  between  all  the  various 
by-products  m  an  industry;  and,  of  course,  always  as  between 
goods  capable  of  substitution  one  for  another.  A  few  illustra- 
tions will  serve  to  make  these  details  clear. 

The  matter  of  properly  correlating  the  freight  rate  on  raw 
materials  and  the  finished  products  made  from  them,  is  more 
far-reaching  than  it  seems.  The  location  and  development 
of   manufacturing   depends   upon   it.     The   country   may   be 

1  7  I.C.C.  Rep.,  92.  ^  p.  gio,  infra. 

3  23  I.C.C.  Rep.,  151  and  657.     Also  ibid.,  404. 


RATE    MAKING    PRACTICE  135 

broadly  divided  into  agricultural  and  manufacturing  sections. 
The  first  of  these  is  ambitious  to  develop  its  resources;  not 
only  to  feed,  but  to  clothe  itself  and  make  other  provision  for 
its  needs.  No  sooner  does  it  seek  to  develop  local  manufactur- 
ing than  it  finds  itself  exposed  to  competition  from  the  older 
established  manufacturers  at  a  distance.  Sometimes,  even, 
these  remote  manufacturers  draw  their  supplies  of  raw  material 
from  its  own  fields  and  forests.  These  supplies  are  then  shipped 
long  distances  as  raw  material;  manufactured  and  thereafter 
returned  to  sell  in  competition  with  the  local  product.  The 
local  market  in  relatively  undeveloped  areas  is  probably  in- 
sufficient to  provide  support  for  manufactures  on  a  profitable 
scale.  It  is  essential  to  dispose  of  the  surplus  product  over  a 
wider  area.  Thus  there  arise  two  classes  of  manufacturers: 
one  "next  the  stump,"  manufacturing  at  the  source  of  the  raw 
material  and  desiring  to  ship  the  finished  product;  the  other, 
remote  perhaps  from  supphes  of  raw  material,  but  favored  by 
long  experience,  by  abundant  supplies  of  capital  and  of  skilled 
labor  and  by  other  advantages.^  Neither  class  of  shippers 
can  prosper  without  overflowing  into  the  domain  of  the  other. 
The  outcome  of  this  competition  depends  in  part  upon  the  policy 
of  the  carriers.  If  the  rate  on  the  raw  material  be  relatively 
low,  the  remote  manufacturer  is  aided.  Cotton  mills  and  shoe 
factories  in  New  England  prosper  in  competition  with  establish- 
ments in  the  South  or  the  Middle  West.  If,  on  the  other  hand, 
the  rate  on  raw  materials  be  inordinately  high,  while  at  the 
same  time  low  on  outward-bound  shipment  of  manufactures 
from  the  seat  of  the  raw  materials,  the  tendency  is  in  favor  of 
the  upbuilding  of  manufactures,  not  near  the  historic  centres 
of  population  and  consumption,  but  near  the  sources  of  natural 
wealth,  which  are  the  potential  homes  of  manufacturing. 

The  long-standing  controversy  over  relative  rates  on  wheat 
and  flour  for  export  affords  an  interesting  illustration  of  the  dif- 

1  Vide  chapter  on  Localization  of  Industry  in  the  Twelfth  Census  of 
Manufactures,  I,  pp.  190-214. 


136  RAILROADS 

ficulties  of  properly  correlating  charges  of  this  sort.^  Originally 
the  rates  on  wheat  and  flour  —  the  raw  material  and  the  manu- 
factured product  —  were  the  same.  In  1890  the  railways 
leading  to  the  Gulf  ports  began  to  discriminate  by  giving  lower 
rates  on  wheat,  but  the  trunk  lines  until  1899  held  to  the  orig- 
inal equality  between  the  two.  Finally,  however,  the  struggle 
between  the  trunk  lines  and  the  Gulf  roads  for  business  forced 
the  former  to  lower  their  rates  on  wheat,  leaving  the  flour  rates 
—  not  subject  to  Gulf  competition  —  undisturbed.  At  times 
the  rate  on  wheat  for  export  was  as  much  as  nine  cents  per 
hundred  pounds  lower  than  the  rate  on  flour.  Thus  the  rate 
on  wheat  for  export  from  the  Mississippi  river  to  the  seaboard 
was  frequently  twelve  cents,  while  the  rate  on  wheat  from  the 
same  points  to  Chicago  added  to  the  rate  on  flour  there  manu- 
factured and  sent  on  in  barrels  or  bags  to  New  York,  was 
twenty-two  cents — a  clear  discrimination  against  the  domestic 
manufacturer  in  this  instance  of  ten  cents  per  hundred  pounds. 
For  his  American-made  flour,  sent  abroad  in  competition  with 
flour  made  in  Liverpool  from  American  wheat,  would  evidently 
cost  that  much  more  at  delivery.  In  other  words,  wheat  could 
be  transported  to  England  and  there  groimd  much  cheaper 
than  it  could  be  ground  here  and  then  shipped.  This  bore 
with  particular  severity  upon  small  millers,  partly  because 
their  costs  of  manufacture  were  relatively  high,  and  also  because 
any  limitation  of  export  business  forced  the  large  miUers  to 
bid  more  keenly  for  local  domestic  trade.  Inasmuch  as  a 
fair  margin  of  profit  to  the  American  manufacturer  would 
not  exceed  two  cents  per  hundredweight,  it  is  apparent  that 
this  discrimination  operated  severely  against  the  American 
miller.  Minneapolis  fortunately  was  unaffected  by  this  dis- 
crimination, much  of  its  exports  going  out  by  Canadian  lines 

lint.  Com.  Rep.,  214;  reprinted  in  Railway  Problems.  A  typical 
later  one  is  1.5  I.C.C.  Rep.,  .351  and  Opin.SlT,  1909,  p.  363.  Also  Ann.  Rep., 
I.C.C.,  1901  and  1902.  Hammond,  Railway  Rate  Theories,  etc.,  1911, 
p.  21;  also,  p.  160. 


RATE   MAKING   PRACTICE  137 

to  the  Lakes.  The  carriers  defended  this  difference  in  rates 
on  the  ground  of  water  competition  by  the  Lakes  or  combined 
rail  and  water  routes,  which  were  alone  open  to  wheat,  and 
which  thereby  unduly  lowered  the  rate  on  that  commodity; 
and  also  on  the  basis  of  the  lower  cost  of  service  in  moving  the 
raw  material  as  compared  with  the  finished  product.  It  is 
apparent  that  issue  was  really  raised  in  such  a  case  between 
the  interests  of  the  farmer  and  of  the  manufacturer.  The 
United  States,  producing  a  surplus  of  wheat  the  price  of  which 
is  made  on  the  Liverpool  market  in  competition  with  the  world, 
is  compelled  to  find  an  outlet  for  this  product.  It  is  obvious 
that  any  reduction  of  the  freight  rate  —  the  prices  in  Liverpool 
remaining  fixed  —  would  inure  to  the  benefit  of  the  farmer,  who 
would  thereby  receive  a  higher  price  for  his  product.  Viewed  in 
this  way  the  railways  by  discriminating  in  favor  of  the  rate 
on  wheat  were  helping  the  farmers.  But,  at  the  same  time, 
by  moving  this  wheat  more  cheaply  than  flour  the  railways 
were  encouraging  the  location  of  flour  milling  abroad  and 
rendering  it  impossible  to  manufacture  flour  for  export  at 
a  profit  in  the  cities  of  the  Middle  West.  In  these  export 
cases  it  does  not  appear  clearly  why  the  rate  on  flour  for  ex- 
port might  not  have  been  reduced  somewhat.  The  Inter- 
state Commerce  Commission  finally  rendered  a  decision  to 
the  effect  that  the  existing  difference  in  rates  constituted  an 
undue  preference  in  favor  of  the  foreign  manufacturer,  adding 
at  the  same  time  that  these  discriminations  seemed  to  be  due 
primarily  not  to  a  desire  of  the  railways  to  aid  the  American 
farmer  in  disposing  of  this  surplus  wheat,  but  to  the  bitter- 
ness of  competition  between  the  Gulf  and  trunk  line  rail- 
ways.^ They  decided  that  any  discrimination  greater  than  two 
cents  per  hundred  pounds  in  favor  of  wheat  for  export  as 
against  flour  was  unreasonable.  This  difference  was  permitted, 
however,  on  account  of  the  greater  cost  of  handling  the  manu- 
factured product.  It  is  significant  of  the  then  state  of  the 
^  CJ.  p.  31,  supra. 


138  RAILROADS 

law  that  the  railways  paid  no  attention  to  this  order,  and, 
although  conditions  improved  somewhat,  there  is  still  great 
complaint. 

The'  relative  rates  on  wheat  and  flour,  even  when  for  domes- 
tic consumption,  illustrate  the  same  difficulty  of  commercial 
competition  —  the  necessity  of  adjusting  the  rate  on  raw  mate- 
rials to  that  on  the  finished  product.^  The  rate  on  wheat 
from  Wichita,  Kan.,  for  example,  to  California  is  fifty-five  cents 
per  hundred  pounds,  while  the  rate  on  flour  between  the  same 
points  is  sixty-five  cents.  Is  this  difference  in  rates  economi- 
cally justifiable?  California  wheat  is  soft,  so  that  flour  pro- 
duced from  it  is  much  improved  by  the  admixture  of  hard  wheat, 
such  as  may  be  obtained  in  Kansas.  California,  formerly  a 
large  wheat  exporting  state,  has  of  late  years  relied  to  a  consider- 
able degree  upon  the  Middle  West  for  part  of  its  supplies. 
Kansas  flour  sells  for  seventy-five  cents  a  barrel  more  than  Cali- 
fornia wheat  flour.  Shall  this  Kansas  wheat,  to  be  consumed 
in  California,  be  ground  in  Wichita  or  in  California?  Here 
is  material  for  controversy,  not  between  one  particular  rail- 
way and  another,  but  in  reality  between  the  millers  in  Kansas 
and  the  millers  in  California.  It  is  quite  analogous  to  the 
issue  raised  over  export  wheat  and  flour  between  the  miller 
in  Chicago  and  his  rival  in  Liverpool.  In  this  instance,  if 
milled  in  Kansas,  the  railways  enjoy  the  carriage  of  flour; 
while,  if  ground  in  California,  the  railways  carry  the  commodity 
in  the  form  of  wheat.  Owing  to  certain  practical  conditions, 
such  as  the  percentage  of  waste  and  relative  differences  in  labor 
costs,  the  Kansas  miller  appears  to  enjoy  a  certain  advantage 
over  his  far  western  competitors.  At  this  point  the  interest  of 
particular  railway  companies  appears.  The  Rock  Island,  if 
the  milling  industry  in  Kansas  develops,  obtains  the  haul 
not  only  of  the  flour  but  also  of  the  fuel  and  of  supplies 
for  the  communities  engaged  in  the  business.     On  the  other 

1 1.C.C.  Rep.,  No.  917;  decided  June  24,  1907.  Later  ones  are  in 
10  Idem,  35  and  16  Idem,  73. 


RATE  INIAKING  PRACTICE  139 

hand  the  Southern  Pacific  is  more  largely  interested  in  the 
local  development  of  manufactures  in  California.  The  Rock 
Island  by  maintaining  a  lower  rate  on  flower  than  on  wheat, 
would  tend  to  hold  its  clients  in  the  field.  The  Southern 
Pacific,  on  the  other  hand,  by  securing  the  reduced  rate  on 
the  wheat  from  Kansas  would  materially  advance  the  wel- 
fare of  its  constituents.  Thus  the  rivalries  of  the  competing 
localities  immediately  become  the  direct  and  immediate  con- 
cern of  rival  railways. 

Cases  precisely  analogous  in  principle  to  those  concerning 
the  relativity  of  rates  on  grain  and  grain  products  have  troubled 
the  carriers  for  years  in  respect  to  the  rates  upon  cattle  and 
packing  house  products.^  A  low  rate  on  cattle  as  compared  with 
beef  favors  Chicago  today  as  against  Missouri  river  points, 
the  latter  being  nearer  the  cattle  ranges;  just  as  a  generation 
ago  it  enabled  cattle  to  be  brought  to  New  York  and  Boston 
to  be  there  slaughtered  and  sold  on  the  spot.  The  history 
of  this  controversy  throws  much  light  upon  the  difficulties  of 
rate  making  in  practice.  Originally  the  railways  encouraged 
cattle  raising  by  a  rate  which  was  only  about  one-third  of  the  rate 
charged  for  beef.  Slaughtering  was  carried  on  in  the  East 
adjacent  to  the  great  markets.  To  this  policy  the  western 
packers  objected  strenuously.  They  demanded  a  relatively 
low  rate  on  their  finished  product  in  order  to  enable  them  to 
bid  against  the  local  eastern  slaughter  houses.  The  stockmen, 
on  the  other  hand,  naturally  desired  a  continuance  of  the  low 
rate  on  cattle,  as  it  perpetuated  competition  between  eastern 
and  western  buyers.  The  controversy  between  the  stock 
raisers  and  the  packers  was  thus  shifted  onto  the  shoulders  of 
the  traffic  managers  of  the  railways.  The  dispute  culminated 
in  1883  when  the  Trunk  Line  Association  appointed  a  special 
committee  to  consider  what  the  proper  adjustment  should  be. 

1  Older  cases  in  Hammond  Railway  Rate  Theories,  etc.,  1911,  p.  45; 
such  as  10  I.C.C.  Rep.,  428,  etc.  Later  are  11  Ideyn,  296;  21  Idem,  491; 
22  Idem,  77  and  160;  and  23  Idem,  656. 


140  RAILROADS 

This  committee  in  turn  referred  the  matter  to  Commissioner 
Albert  Fink,  "Seeking  a  relativity  of  rates  so  as  to  make  the 
charges  for  transportation,  including  the  expenses  incident  to 
the  transportation  of  dressed  b^ef,  the  same  per  pound  as  the 
charges  per  pound  of  dressed  beef  transported  to  the  East  in 
the  shape  of  live  stock."  A  difficult  task  this,  considering  the 
variety  of  by-products  emerging  into  value  year  by  year. 
Cattle  rates  had  been  for  some  time  fifty-two  per  cent.,  and  then 
later  sixty  per  cent,  of  the  dressed  beef  rates.  This  was  rela- 
tively higher  for  cattle  than  had  been  charged  during  the 
seventies.  But  the  western  packers  demanded  that  the  rela- 
tivity in  favor  of  the  finished  product  be  still  further  advanced 
until  cattle  rates  should  equal  seventy-five  per  cent,  of  the  rates 
on  beef.  This  would  effectually  discourage  the  shipment  of 
cattle  to  eastern  centres,  and  would  tend  to  upbuild  Kansas 
City  and  Chicago  at  their  expense.  In  1884,  the  matter  being 
still  in  dispute,  was  referred  to  Hon.  T.  M.  Cooley,  afterward 
chairman  of  the  Interstate  Commerce  Commission.  He  de- 
cided that  a  fair  compromise  would  be  forty  cents  on  cattle  from 
Chicago  to  New  York  wdth  coincident  rates  of  seventy  cents  on 
beef.  This  would  make  the  cattle  rate  about  fifty-seven  per 
cent,  of  the  beef  rate.  It  was  a  victory  for  the  stockmen  as 
against  the  western  packers,  who  at  once  raised  a  great  outcry. 
It  would  have  been  difficult  to  predict  the  final  outcome  had 
not  an  entirely  new  factor  appeared,  which  transformed  the 
conduct  of  the  beef  packing  industry.^  Specially  constructed 
stock  cars  owned  by  private  companies  began  to  be  built. 
These  favored  the  perpetuation  of  competition  between  east- 
ern and  western  packers.  To  checkmate  this,  the  western 
packers  had  already  embarked  in  1879  upon  the  ownership  of 
privately  owned  refrigerator  cars  for  the  carriage  of  their 
finished  products.  The  custom  was  adopted  by  the  railways 
of  paying  for  the  use  of  these  cars  by  making  an  allowance  of 

^  The  best  accounts  are  in  connection  with  the  history  of  private  car 
abuses.     Cf.  references  on  p.  192,  infra. 


RATE   MAKING  PRACTICE  141 

so  much  a  mile  as  a  deduction  from  the  established  tariffs. 
This  at  once  opened  the  way  to  secret  rebates  of  all  sorts. 
The  refrigerator  traffic  in  these  private  cars  was  large  in  vol- 
ume, very  regular  and  highly  concentrated  as  to  source.  A 
large  tonnage  could  be  diverted  at  any  time  to  that  road  which 
could  best  show  its  appreciation  of  the  favor.  The  Grand 
Trunk,  for  instance,  in  1887  swept  the  board,  monopolizing 
this  entire  business  for  a  brief  time,  obtaining  it  by  secret  and 
discriminating  rates.  The  railways,  jointly,  sought  to  free 
themselves  from  the  domination  of  the  large  packers;  but  the 
phenomenal  growth  of  their  business,  both  domestic  and  ex- 
port, rendered  them  too  powerful  to  resist.  According  to 
expert  data,  during  nine  months  to  May  1,  1889,  three  ship- 
pers alone  received  from  one  line  of  road  $72,945  for  the  use 
of  their  cars.  This  about  equalled  the  initial  cost  of  eighty 
new  cars.  For  the  fiscal  year  1895,  $8,744,000  was  paid  by 
the  railways  of  the  United  States  for  the  use  of  these  cars  — 
about  $4,000,000  of  this  being  in  the  form  of  rental.  At  this 
rate,  profits  of  from  twenty-five  to  fifty  per  cent,  upon  the  in- 
vestment accrued  to  the  great  packers.  These  virtual  rebates, 
of  course,  drove  all  competitors  from  the  field.  The  story  of 
the  gradual  extension  of  this  system  of  private  cars  to  include 
fruit  and  produce  business  belongs  in  another  place.  Suffice 
it  to  say  that  the  bondage  was  broken  only  by  the  passage  of 
the  Hepburn  Act  of  1906.  The  growth  of  these  private  refrig- 
erator car  lines  caused  the  disappearance  of  live  stock  shipments. 
Packing  and  slaughtering  on  a  large  scale  at  the  seaboard,  either 
for  domestic  consumption  or  export,  was  doomed.  Mean- 
time, however,  the  controversy  over  the  relative  rates  on  beef 
and  cattle  continued  just  as  if  anything  really  depended  upon 
it.  The  issue  was  again  submitted  to  the  commissioner  of 
the  Trunk  Line  Association  in  1887.  In  the  following  year  a 
select  committe  of  the  United  States  Senate  was  appointed  at 
the  urgent  request  of  the  cattle  raisers.  Testimony  before 
this  committee  showed  in  detail  how  eastern  packers  were 


142  RAILROADS 

striving  to  build  up  establishments  near  the  points  of  consump- 
tion, but  were  driven  out  of  the  business  by  the  relatively 
high  costs  of  shipping  cattle,  as  compared  with  the  rates  at 
which  dressed  beef  could  be  actually  delivered  from  Chicago 
and  Missouri  river  points.  This  entire  history,  aside  from 
its  significance  as  a  study  of  personal  discrimination,  illustrates 
the  effect  of  a  relatively  increasing  differential  rate,  partly 
open  and  partly  secret,  against  the  raw  material  of  an  industry 
as  compared  with  the  finished  product.  The  result,  at  all 
events,  has  been  to  concentrate  the  packing  industry  in  the 
Middle  West.  Nor  is  the  controversy  closed  even  yet.^  But 
this  time  it  is  a  question,  not  between  the  seaboard  and  Chi- 
cago, but  between  Chicago  and  Missouri  river  points,  or  those 
still  nearer  the  southwestern  ranges.  Fort  Worth  and  Okla- 
homa City  now  become  complainants  against  the  Missouri 
river  points.'  Always  and  everywhere  the  manufacture  seeks 
to  develop  at  or  near  the  source  of  the  raw  material.  Whenever 
this  tendency  does  not  appear  in  an  industry  it  is  pertinent  to 
inquire  how  far  the  relative  adjustment  of  rates  is  responsible 
for  the  phenomenon. 

Complexities  in  rate  adjustment  often  arise  from  the  fact 
that  in  the  manufacture  of  many  commodities  the  marketing 
of  by-products  is  of  increasing  importance.  The  rate  on  the 
whole  series  of  related  commodities  must  be  taken  into  account 
at  once.  Thus  in  lumbering,  a  large  amount  of  waste  or  very 
low-grade  lumber  is  necessarily  produced.  This  common  lum- 
ber cannot  bear  long  transportation;  it  must  be  utilized  locally, 
if  at  all.  On  the  other  hand,  the  choicest  specialties  will  com- 
mand a  price  even  in  remote  markets..  A  monopoly  price 
is  enjoyed  in  such  a  case.  The  Pacific  coast  lumbermen  can 
market  their  long  timbers  anywhere  in  the  United  States; 
but  the  demand  for  the  common  lumber,  restricted  to  a  sparsely 

'  U.  S.  Supreme  Court  decision  in  the  Chicago  Live  Stock  Exchange 
case  in  1908;  209  U.  S.  108. 

»  22  I.C.C.  Rep.,  160;  22  Idem,  656. 


RATE  MAKING  PRACTICE  143 

populated  region,  tends  to  be  exceeded  by  the  supply.^  The 
real  competition  between  the  southern,  the  Michigan,  the 
Wisconsin  and  the  Pacific  coast  manufacturers  thus  narrows 
down  to  the  sale  of  the  medium-grade  product.  And  the  cost 
of  production  of  this  is,  of  course,  in  part  dependent  upon  the 
profit  made  upon  the  other  two  sorts,  each  of  which  in  its 
own  field  appears  to  be  a  monopoly.  A  wide  market  and  a 
good  price  for  medium-grade  lumber  may  so  lessen  the  cost 
of  the  cheapest  by-products  that  they  in  turn  may  be  so  re- 
duced in  price  as  to  widen  their  reach  to  the  consumer.  Each 
rate  reacts  upon  the  others.  The  situation  can  be  successfully 
controlled  only  by  adjusting  them  all  at  once. 

Not  only  are  rates  competitive  as  between  raw  materials 
and  the  finished  product  made  from  them,  but  the  circle  of 
competition  immediately  widens  to  include  all  commodities 
capable  of  substitution  one  for  another. ^  Coal  rates,  of  course, 
are  partly  determined  by  rates  on  cordwood,  and  vice  versa. 
During  the  great  coal  strike  in  Pennsylvania  in  1903,  soft  coal 
rates  and  hard  coal  rates  were  sadly  disturbed.  Such  sub- 
stitutions are  always  likely  to  occur.  But  the  conditions  are 
not  always  so  simple  as  this.  An  instance  in  point  is  given 
by  a  witness  before  the  Senate  (Elkins)  Committee  on  Inter- 
state Commerce  in  1905.^  This  shows  how  a  reduction  in  the 
rate  for  transportation  of  corn  from  Kansas  to  Texas  brought 
about  a  corresponding  reduction  in  the  rate  on  flour  from 
Minneapolis  to  Chicago.  There  was  a  large  crop  of  corn  in 
Kansas;  and  the  Chicago  lines  anticipated  brisk  business  in 
the  carriage  of  this  product.  The  traffic  managers  of  lines 
from  Kansas  to  Texas,  however,  discovered  a  large  demand 
for  corn  in  Texas  at  a  price  higher  than  then  prevailed  in 
Kansas.     Any  rate  less  than  the  difference  in  prices  between 


1 14  I.C.C.  Rep.,  1-74. 

2  Cf.  Hammond,  Railway  Rate  Theories,  etc.,  1911,  pp.  14-17,  mainly 
with  reference  to  classification,  however. 

5  Testimony,  vol.  II,  p.  1676.     11  I.C.C.  Rep.,  pp.  212  and  220. 


144  RAILROADS 

the  two  districts  would  cause  shipments  of  corn  to  flow  from 
Kansas  to  Texas,  just  as  inevitably  as  water  flows  down  hill. 
This  rate  would  needs  be  low ;  but  the  corn  could  be  loaded  on 
empty  southbound  cars  which  had  been  used  to  haul  cotton 
out  of  Texas  to  the  north.  This,  of  course,  entailed  a  diversion 
of  corn  from  the  Chicago  railways,  which  promptly  reduced 
rates  in  order  to  hold  their  traffic.  For  years  the  rates  upon 
wheat  and  corn  had  been  fixed  in  a  definite  relation  to  one 
another,  based  upon  commercial  experience.  Any  reduction 
of  the  corn  rate  compelled  a  reduction  of  the  wheat  rate.  A 
fall  in  the  wheat  rate  brought  about  a  drop  in  the  rate  on 
flour.  These  reductions  in  corn  started  in  southern  Kansas; 
but  parallel  lines  in  northern  Kansas  were  compelled  to  follow 
suit.  Grain  in  the  territory  between  the  two  roads  could  be 
hauled  by  wagon  either  north  or  south  corresponding  to  a  frac- 
tion of  a  cent  per  bushel  difference  in  the  price.  Thus  the  re- 
duction in  rates  spread  from  one  line  to  another  all  over  Kansas, 
throughout  Nebraska  up  into  Dakota  and  finally  to  Miimesota. 
It  not  only  affected  the  corn  rate  everywhere  but  it  caused 
a  reduction  in  the  rate  on  flour  from  Minneapolis  to  Chicago. 
The  reliance  of  Texas  for  a  portion  of  its  corn  supply  upon 
the  surplus  product  of  Kansas  sometimes  leads  to  odd  results. 
This  commodity  is  sometimes  shipped  as  corn  meal  and  some- 
times transported  as  corn  to  be  afterwards  ground  in  Texas. 
The  Texas  millers  at  one  time  demanded,  a  relative  reduction 
of  the  rate  on  grain  as  compared  with  corn  meal,  and  the  rail- 
way commission  of  that  state  upheld  them  in  that  demand. 
For  ten  years  down  to  1905  the  differential  in  favor  of  the  raw 
product  had  been  three  cents  a  hundred  pounds.  Then  the 
railways,  in  connection  with  a  general  advance  of  rates,  in- 
creased the  charge  on  corn  meal  until  it  amounted  to  about 
nine  cents  per  hundred  pounds  more  than  the  rate  on  corn. 
One  cent  a  hundred  pounds  being  a  good  profit  in  grinding 
corn  meal,  this  change  shut  the  Kansas  millers  out  of  Texas 
business.     Application  was  made  to  the  Interstate  Commerce 


RATE   MAKING  PRACTICE  145 

Commission  for  relief.  It  then  appeared  on  investigation  that 
the  carriers  had  made  use  of  the  Texas  millers  in  order  to 
prevent  a  general  reduction  of  both  grain  rates  and  rates  on 
grain  products.  The  Texas  millers  on  general  principles  had 
favored  both  these  reductions.  Wliat  happened  is  best  de- 
scribed in  the  evidence  before  the  Senate  Committee  on  Inter- 
state Commerce  of  1905.  ''The  railways  went  to  the  millers 
of  Texas  and  they  said  to  them,  'Is  there  anything  you  want 
here?'  'Why/  said  the  [Texan]  millers,  'yes;  we  would  like  to 
have  that  differential  between  corn  and  corn  meal  increased;  we 
think  you  ought  to  put  the  rate  on  corn  meal  up.'  The  railway 
said,  'AH  right;  you  just  stay  away  from  that  meeting  down 
at  Austin  so  that  there  will  not  be  any  excuse  for  the  Texas 
commission,  and  if  it  undertakes  to  reduce  these  rates  we  will 
raise  this  differential;  we  will  raise  the  rate  on  corn  meal  to 
the  rate  on  flour.'  The  millers  kept  away  from  Austin  — 
they  kept  their  part  of  the  bargain  —  and  they  stayed  away, 
and  the  Texas  commission  was  left  without  any  support  for 
their  proposition  to  reduce  the  corn  rates,  and  the  railway  kept 
their  part  of  the  bargain  and  lifted  up  the  rate  on  corn  meal  so 
that  the  differential  was  from  nine  to  seven  and  one-half  cents, 
and  that  put  the  Kansas  mills  out  of  business." 

Apparently  insignificant  details  often  determine  the  out- 
come of  commercial  competition.  Thus  in  the  milling  business, 
where  the  margin  of  profit  in  the  manufacture  of  flour  may 
not  be  over  three  cents  per  barrel,  an  infinitesimal  change  in  the 
freight  rate  may  mean  success  or  failure  to  long-established 
industries.  And  the  conditions  vary  indefinitely.  Thus,  as 
between  flour  milling  in  Duluth  and  Buffalo,  Duluth  can  buy 
its  wheat  from  the  farmer  direct  during  the  entire  winter,  but 
must  ship  its  product  mainly  during  the  period  of  open  water 
navigation  on  the  lakes.  The  reverse  is  true  with  the  Buffalo 
miller  who  can  ship  out  his  flour  during  the  entire  season,  but 
who  must  accumulate  his  whole  stock  of  wheat  before  navi- 
gation closes.     And  then  Minneapolis  as  a  milling  centre  has 

VOL.  I — 10 


146  RAILROADS 

to  be  taken  into  account.  Eighty  per  cent,  of  the  spring  wheat 
grown  in  the  United  States  is  in  territory  from  which  the  freight 
rates  to  Minneapolis  and  Duluth  are  the  same.  But  the  basic 
rate  to  the  East  and  Europe,  fixing  the  all-rail  rates,  is  the 
combined  lake  and  rail.  By  this  route  Duluth  is  one  hundred 
and  fifty  miles  nearer  the  market  than  is  Minneapolis,  and 
consequently  enjoys  a  lower  rate  on  its  flour  shipped  out.  A 
three-cornered  competitive  problem  exists,  in  which  any  change 
at  one  point  entirely  upsets  the  commercial  equilibrium. 

The  obligation  on  the  part  of  a  railway  to  protect  its  con- 
stituency, not  only  in  respect  of  particular  rates,  but  in  general 
conditions  as  well,  introduces  still  further  complications.  The 
freight  business  of  New  England,  for  example,  consists,  first, 
of  the  carriage  of  raw  materials  and  supplies  inwards;  and, 
secondly,  thereafter  of  the  transportation  of  the  finished  pro- 
duct out  to  the  consuming  markets.  Narrowly  considered,  it 
may  seem  expedient  to  crowd  the  rate  on  coal  as  high  as  the 
value  of  service  probably  will  permit;  but  viewed  in  a  large 
way,  it  may  prove  to  be  a  far  better  business  policy  to  maintain 
the  rate  on  coal,  cotton,  and  other  staple  supplies  so  low,  that 
the  growth  of  population  and  production  may  in  the  long  run 
yield  far  greater  returns  on  the  high-grade  manufactures  which 
the  territory  produces.  Turning  to  the  southern  field,  where 
the  economic  conditions  are  reversed,  it  may  be  the  better 
policy  to  hold  down  the  rate  on  raw  cotton  in  order  thereby 
to  stimulate  this  great  basic  industry  and  thereby  enhance  the 
demand  for  the  merchandise  and  foodstuffs  which  depend  upon 
general  prosperity.  A  free  hand  afforded  for  the  suitable  adjust- 
ment of  such  apparently  independent  services  may  contribute 
far  more  to  the  general  welfare  than  an  insistence  upon  a  petty 
and  near-sighted  policy  of  extorting  from  each  individual  ser- 
vice all  the  rate  it  can  possibly  endure.  American  railway  man- 
agers are  gradually  but  surely  coming  to  take  a  more  liberal  view 
of  these  great  possibilities  and  to  consider  the  economic  devel- 
opment of  their  territories,  not  narrowly,  but  in  a  generous  way. 


CHAPTER  V 
RATE   MAKING  IN  PRACTICE   (Continued) 

Effect  of  changing  conditions,  147.  —  Lumber  and  paper  rates,  148.  — 
Equalizing  industrial  conditions,  148.  —  Protecting  shippers,  149.  — 
Pacific  Coast  lumber  rates,  150.  —  Elasticity  and  quick  adaptation, 
152.  —  Rigidity  and  delicacy  of  adjustment,  153.  —  Transcontinental 
rate  system,  154.  —  Excessive  elasticity  of  rates,  155.  —  More  stability 
desirable,  159.  —  Natural  v.  artificial  territory  and  rates,  159.  — 
Economic  waste,  159.  — Inelastic  conditions,  161. —  Effect  upon 
concentration  of  population,  162.  —  Competition  in  transportation 
and  trade  contrasted,  163.  —  No  abandonment  of  field,  165. 

Cost  V.  value  of  service,  166.  —  Relative  merits  of  each,  167. — Charg- 
ing what  the  traffic  will  bear,  169.  —  Unduly  high  and  low  rates, 
171.  —  Dynamic  force  in  value  of  service,  177.  —  Cost  of  service  in 
classification,  179.  —  Wisconsin  paper  case,  181.  —  Cost  and  value  of 
service  equally  important,  checking  one  another,  184. 

Not  only  must  rates  of  all  sorts  be  delicately  adjusted  to 
suit  the  immediate  exigencies  of  trade;  they  must  be  con- 
stantly modified  in  order  to  keep  pace  with  its  ever  changing 
conditions.  This  is  peculiarly  true  of  a  rapidly  growing  coun- 
try like  the  United  States.  An  admirable  instance  is  afforded 
by  the  complaint  of  the  Lincoln  Commercial  Club  before  the 
Interstate  Commerce  Commission.^  Lincoln,  Nebraska,  lies 
about  fifty-five  miles  southwest  of  Omaha.  Originally  all  its 
supplies  came  from  the  East,  as  both  cities  were  for  a  time 
outposts  of  civilization.  The  coal  supply  came  from  Iowa  and 
Illinois,  and  the  salt  from  Michigan.  On  these  and  most  other 
commodities  the  rates  to  Lincoln  were  made  up  of  a  through 
rate  from  the  East  to  the  Missouri  river,  plus  the  local  rate  on 
to  destination.  The  city  of  Lincoln  thus  paid  considerably 
more  than  Omaha  for  all  of  its  supplies.     Gradually  conditions 

1 13  I.C.C.  Rep.,  319.  The  general  investigation  of  wool  rates  is 
another  admirable  instance.     23  Idem,  151. 


148  RAILROADS 

have  changed;  until  in  1907  it  appeared  that  over  half  the  soft 
coal  consumed  in  Lincoln  was  brought  from  Kansas  and  Mis- 
souri; four-fifths  of  the  lumber  from  the  South  and  nearly  all 
the  rest  from  the  Pacific  coast;  glass  and  salt  from  the  gas 
belt  and  salt  beds  of  Kansas;  and  a  great  deal  of  beet  sugar 
from  the  western  fields.  For  a  large  proportion  of  these  and 
other  supplies,  Lincoln  was  actually  as  near  or  nearer  the  point 
of  production  than  Omaha,  and  yet  the  difficulties  of  effecting 
an  adjustment  between  rival  carriers  had  prevented  any  modi- 
fication of  rates  corresponding  to  these  changes  in  economic 
conditions.  On  every  one  of  these  commodities  the  rate  to 
Lincoln  remained  steadily  higher  than  to  Omaha,  regardless  of 
the  source  of  supply.  Unanimous  consent  was  necessary  for  re- 
adjustment. So  long  as  any  single  road  refused  assent,  a  gen- 
eral rate  disturbance  might  be  precipitated  by  any  independent 
action.  The  beneficent  effect  of  the  exercise  of  governmental 
authority,  powerful  enough  over  all  interested  parties  to  compel 
acquiescence,  has  been  clearly  apparent  in  affording  relief. 

A  similar  instance  in  the  state  of  Wisconsin  is  afforded 
by  the  compulsory  readjustment  of  the  freight  rate  on  wood 
pulp,  lumber  and  sawed  logs.^  On  investigation  it  appeared 
that,  despite  a  very  much  lower  commercial  value  for  the  raw 
material  used  in  paper  manufacture,  the  rates  on  pulp  wood 
were  more  than  double  those  on  logs  to  be  sawed  up  for  lumber. 
It  appeared,  furthermore,  that  this  apparent  anomaly  was  due 
not  so  much  to  high  rates  on  the  pulp  wood  as  to  very  low  rates 
on  sawed  logs.  These  latter  rates  for  many  years  had  been  fixed 
at  a  very  low  figure  because  originally  the  bulk  of  such  logs, 
cut  in  the  river  bottoms,  was  floated  down  stream  to  mills 
along  the  Mississippi  river.  Competition  with  lumber  raft 
rates  originally  determined  the  charges  on  lumber  by  rail. 
The  paper  industry  did  not  begin  until  these  conditions  of 
water  competition  had  quite  disappeared.  Gradually,  with 
the  progress  of  deforestation,  all  the  timber  is  now  found  on  the 
^  Wisconsin  Railroad  Commission,  1908.     C/.  p.  181,  infra. 


RATE   MAKING  PRACTICE  149 

uplands  far  from  navigable  water  courses;  so  that  the  rates 
today  are  not  at  all  influenced  by  competitive  rates  on  the 
lumber  rafts  down  river.  Nevertheless  the  old  tariffs  on  lum- 
ber remained  in  force  despite  the  changed  conditions,  while 
the  new  rates  on  pulp  wood  were  fixed  independently  of  any 
rates  by  water.  It  was  only  after  careful  investigation  that 
the  injustice  to  the  paper  manufacturers  from  the  disparity  in 
charges  appeared.  Here  again  it  was  the  rigidity  and  inter- 
locked complexity  of  adjustment  which  placed  it  in  the  power 
of  one  road  to  block  change  of  any  sort.^  The  compulsory 
exercise  of  governmental  authority  cut  the  Gordian  knot  with 
the  result  that  substantial  justice  now  obtains.^ 

From  the  preceding  statements  it  will  be  observed  that 
carriers  have  another  important  commercial  function  beside 
that  of  equalizing  industrial  conditions.^  They  also  act  in  a 
protective  or  insurance  capacity  to  the  merchant  or  manufac- 
turer. The  policy  of  ''keeping  everyone  in  business"  implies 
not  only  variety  but  variabihty  of  conditions.  Capital  is 
proverbially  timid.  It  will  not  venture  into  a  new  and  un- 
certain enterprise  unless  either  profits  are  immediate  and  high 
or,  if  moderate,  likely  to  endure.  In  any  event  some  guarantee 
of  permanence  is  required.  This  guarantee  the  carrier  is  often 
able  to  offer.  It  may  assume  the  obligation  of  protecting  its 
clients;  that  is,  of  saving  them  harmless  against  the  intrusion 
or  irruption  of  hm-tful  competition.  It  thus  exercises  in  a 
certain  sense  the  function  of  an  insurance  company,  but  with 
this  important  difference:  that  while  it  has  the  strongest  in- 
terest in  protecting  its  established  industries  against  ruinous 

'  The  diverse  interests  to  be  reconciled  must  also  include  the  lumber- 
ing centres  once  "next  the  stump,"  but  now  placed  at  a  relative  disad- 
vantage. The  Eau  Claire  lumber  case  [reprinted  in  Railway  Problems, 
pp.  203-233]  should  be  read  in  this  connection. 

2  The  remarkable  rise  of  the  sash,  door  and  blind  industry  in  the  South, 
as  prejudiced  by  comparison  with  Chicago  under  an  outworn  schedule  of 
rates,  is  given  in  23  I.C.C.  Rep.,  110. 

'  On  the  parity  cases,  consult  Hammond,  Railway  Rate  Theories,  etc 
1911,  pp.  120  and  149. 


150  RAILROADS 

competition  from  abroad,  it  may  desire  to  share  in  some  degree 
in  their  development  and  prosperity  by  way  of  reward.  In 
this  latter  sense  the  relation  of  the  carrier  to  its  clients  par- 
takes of  a  profit-sharing  arrangement.  One  of  the  broadest 
issues  between  American  railways  and  the  public  at  the  present 
time  is  precisely  this :  whether  the  carriers  are  to  share  in  busi- 
ness profits;  or  merely,  in  addition  to  furnishing  transportation, 
are  to  collect  a  fixed  fee  for  a  service  in  the  nature  of  industrial 
insurance.  That  it  lies  in  their  way  to  furnish  such  protection 
under  modern  economic  practice  is  an  indisputable  fact. 

This  nice  question  is  almost  daily  pressing  for  solution  at 
the  hands  of  the  Interstate  Commerce  Commission.  It  arises 
every  time  an  increase  of  freight  rates  occurs.  Take,  for  ex- 
ample, the  Pacific  coast  lumber  cases  of  1908.  The  dissenting 
opinions  of  the  Commission  show  how  debatable  the  proposi- 
tion is.^  Up  to  about  1893  the  lumber  interests  of  the  Pacific 
coast  were  quite  undeveloped  and  entirely  dependent  upon 
water  transportation  for  reaching  markets.  At  this  time  low 
rates  of  forty  to  sixty  cents  per  hundred  pounds  on  forest  prod- 
ucts to  markets  in  the  Middle  West  were  introduced,  partly 
to  build  up  the  industry  and  partly  to  create  a  back  loading 
for  the  preponderantly  westbound  tonnage  of  all  transconti- 
nental' lines.  Under  these  rates  the  business  has  enormously 
developed  until,  on  the  Northern  Pacific  road  in  1906,  the  ship- 
ments of  lumber  east  bound  amounted  to  one-third  of  its  entire 
traffic  both  ways,  and  yielded  nearly  one-fifth  of  its  freight 
revenue.  So  greatly  had  this  traffic  expanded  that  it  aided, 
if  not  actually  produced,  a  reversal  of  the  direction  of  trans- 
continental empties.  Practically  all  these  roads  now  have  an 
excess  of  tonnage  to  the  east  whereas  ten  years  ago  much  the 
larger  volume  of  freight  was  moving  westward.  Meantime 
the  lumbermen  under  the  stimulus  of  these  lower  rates,  and 
of  the  phenomenal  rise  in  the  price  of  lumber,  had  been  wonder- 

» 14  I.C.C.  Rop.,  1-74  and  Ann.  Rep.  I.C.C,  1911,  p.  46.  The  later 
judicial  history  will  be  found  at  p.  543,  infra. 


RATE  MAKING  PRACTICE  151 

fully  prosperous.  The  price  of  logs  had  risen  s'nce  1893  from 
about  $2.50  per  1,000  feet  to  $13.50  m  1906;  partly  in  conse- 
quence of  the  extraordinary  demand  consequent  on  the  Val- 
paraiso and  San  Francisco  earthquakes.  The  mills  had  moved 
in  from  the  rivers  and  the  coast,  and  had  become  absolutely 
dependent  upon  rail  transportation  for  reaching  markets.  At 
this  stage,  and  most  unfortunately  in  November,  1907,  just  at 
a  time  of  industrial  panic,  the  carriers  raised  their  rates  by 
about  ten  cents  per  one  hundred  pounds.  The  market  price 
of  logs  had  already  dropped  from  $13.50  per  thousand  by 
approximately  one-third.  These  two  causes,  commercial  de- 
pression and  the  increased  freight  rate,  brought  about  a  com- 
plete collapse  in  the  industry.  And  the  increased  freight 
rates  were  contested  before  the  Interstate  Commerce  Commis- 
sion in  the  hope  that,  as  in  the  southern  field  the  rate  increases 
from  Georgia  points  had  been  annulled,  ^  these  might  also  be 
found  mireasonable.  The  broad  question  concerns  the  obliga- 
tion of  carriers,  once  having  brought  about  an  investment  of 
capital  in  the  industry,  to  continue  to  give  the  same  rates  as 
those  under  which  the  ventures  had  been  undertaken,  due 
regard  being  had,  of  course,  to  such  changes  in  costs  of  service 
as  might  have  ensued.  The  lumbermen  demand  that  all  the 
increment  of  profit  due  to  prosperous  developments  shall  remain 
unto  them;  in  other  words,  that  the  carriers'  share  of  the 
increased  values  shall  remain  fixed.  On  the  other  hand,  the 
railways  defend  their  increases,  partly  upon  the  ground  of 
increasing  expenses  of  operation,  and  partly  upon  the  broader 
ground  that  the  freight  rate  being  proportioned  to  the  price 
of  the  product,  should  rise  in  harmony  with  it.  Upon  this 
question  the  Commission  was  divided,  the  majority  holding 
in  favor  of  annulling  the  increase,  while  the  chairman  and  one 
other  member  decided  that  the  increase  was  justifiable.^ 

1  P.  4S9,  infra. 

2  Rates  must,  not  vary  with  profits.     13  I.C.C.  Rep.,  429;    and  con- 
sistently held  ever  since. 


152  RAILROADS 

Elasticity  and  quick  adaptation  to  the  exigencies  of  business 
are  peculiarities  of  American  railway  operation.  Our  railway 
managers  have  always  been  most  progressive  in  seeking,  in 
and  out  of  season,  to  develop  new  territory  and  build  up  traffic. 
The  strongest  contrast  between  Europe  and  the  United  States 
lies  in  this  fact.  European  railways  more  often  take  business 
as  they  find  it.  Our  railways  make  it.  Much  of  this  business 
is  made  possible  only  by  special  rates  adapted  to  the  case  in 
hand.  These  need  not  be  secret  or  discriminating,  as  has 
already  been  observed.  For  although  offered  with  reference 
to  particular  cases,  they  may  be  open  to  all  comers.  The 
economic  justification  lies  in  the  fact  that  the  railway  can 
afford  to  make  a  low  rate,  leaving  a  bare  margin  of  profit  above 
the  extra  cost  of  adding  this  traffic  to  that  which  is  already 
in  motion.  Such  rates  cannot  exceed  a  definite  figure  based 
upon  what  the  traffic  will  bear.  A  higher  rate  than  this  would 
kill  the  business.  Something  is  contributed  toward  fixed 
charges  by  the  new  traffic,  so  far  as  the  railway  is  concerned;  and 
at  the  same  time  the  shipper  on  his  part  is  enabled  to  enlarge 
his  operations.  Yet  such  a  scale  of  rates  if  applied  to  the  whole 
traffic  of  the  railway  might  be  ruinous  in  the  extreme.  The 
domestic  shipper  of  wheat  may  conceivably  be  helped,  rather 
than  injured,  by  a  special  rate  on  grain  for  Liverpool  without 
which  the  railway  would  lose  the  business  entirely.  To  trans- 
port California  fruit  for  a  mere  fraction  of  the  rate  per  ton  mile 
which  is  laid  upon  other  traffic  may  actually  enable  those  other 
goods  to  be  carried  more  cheaply  than  before.  Of  course,  if 
the  other  traffic  be  directly  competitive,  as  for  instance  in  this 
case,  oranges  from  Florida,  that  is  an  entirely  different  matter. 
Railway  representatives  rightfully  insist  upon  these  special 
rates  to  develop  new  business  as  a  boon  to  the  commercial 
world.  They  contrast  them  with  the  hard  and  fast  schedules 
of  European  railways.  They  allege  that  such  elasticity  loosens 
the  joints  of  competition,  "keeps  everyone  in  business,"  equal- 
izes prices  over  large  areas,  and  is  in  fact  the  life  of  trade.     One 


RATE  MAKING  PRACTICE  153 

of  the  stock  objections  to  railway  regulation  is  that  it  may 
lessen  this  elasticity,  "substitute  mile  posts  for  brains,"  and 
produce  stagnation  in  place  of  activity. 

Paradoxical  as  it  may  seem,  a  certain  rigidity  of  rate  sched- 
ules is  a  natural  consequence  of  the  very  delicacy  with  which 
individual  rates  are  adjusted  to  meet  the  demands  of  trade. 
Each  road  is  jealously  and  aggressively  alert  to  protect  its  own 
constituency  regardless  of  the  rights  of  others.  No  single 
traffic  manager  is  free  to  grant  reductions  of  rates,  even  when 
considered  to  be  just,  by  reason  of  the  opposition  of  competing 
lines.  The  consent  of  every  one  of  these  interests  is  necessary 
in  order  to  insure  stability,  and  the  penalty  for  acting  inde- 
pendently may  be  a  rate  war,  disastrously  affecting  relations 
with  connecting  lines.  Thus,  for  example,  in  the  South  the 
Southern  Railway  for  some  time  was  willing  to  concede,  as  a 
measure  of  justice,  a  reduction  of  rates  on  cotton  from  Missis- 
sippi river  points  to  the  mills  in  North  and  South  Carolina.^ 
The  growth  of  the  textile  industry  had  resulted  in  a  demand 
for  cotton  far  exceeding  the  production  of  the  CaroUnas.  At 
the  same  time  the  increasing  attention  devoted  to  manufac- 
turing of  a  higher  grade  had  forced  the  manufacturers  to  draw 
upon  the  long-staple  supphes  of  the  Mississippi  bottom  lands. 
The  Piedmont  cotton  was  too  short  in  fibre  for  the  finer  sort 
of  goods.  The  Carolina  mills  were,  however,  compelled  to 
pay  a  higher  rate  upon  cotton  from  such  points  as  Memphis 
than  was  paid  for  the  long  haul  up  to  New  England.  Thus, 
for  instance,  as  late  as  1900,  rates  were  fifty-nine  cents  to  South 
Carolina,  while  they  were  only  fifty-five  and  one-half  cents 
per  hundred  pounds  from  the  same  points  to  New  England 
mills.  This  was  obviously  unjust.  But  the  Southern  Rail- 
way alone,  interested  in  the  welfare  of  its  Carolina  clients,  was 
powerless  to  act  without  the  consent  of  its  competitors  operat- 

1  Arbitration  of  Cotton  Rates,  etc.,  Nov.  15  and  16,  1900;  pamphlet 
arguments  of  Southern  v.  Illinois  Central  Railways.  Wool  rates  are  the 
same.     23  I.C.C.  Rep.,  151. 


154  RAILROADS 

ing  from  Memphis  west  of  the  Alleghanies.  These  latter  lines, 
having  no  interest  in  the  southern  mills  and  a  unity  of  interest 
in  the  long  haul  traversed  to  New  England,  sought  to  prevent 
an  equalization  of  the  differences.  Controlling  rates  also  on 
cotton  for  export  to  various  seaports,  they  were  for  a  long 
time  able  to  prevent  a  change.  On  the  other  hand,  in  the 
same  territory  the  railways  operating  south  from  Cincinnati 
and  Louisville  desired  to  reduce  rates  on  manufactured  prod- 
ucts from  the  Central  West.^  These  were  the  very  lines  which 
in  the  former  instance  prevented  the  reduction  of  cotton  rates 
on  the  Southern  Railway  to  Carolina  points,  by  threats  to 
meet  such  reductions  by  cutting  their  own  rates  on  cotton 
going  north  through  the  Ohio  gateways.  Yet  a  reduction  of 
their  rates  on  manufactures  for  building  up  western  trade 
threatened  the  business  of  the  Southern  Railway,  which  had 
been  mainly  interested  in  the  traffic  from  Atlanta  seaboard 
points.  It  may  readily  be  seen  that  this  situation,  extend- 
ing to  practically  every  important  point,  "jacked  up"  all  these 
rates,  not  because  of  their  inherent  reasonableness  and  not 
even  because  the  railways  independently  acknowledged  them 
to  be  just,  but  simply  and  solely  because  any  disturbance  of 
this  house  of  cards  might  lead  to  a  general  downfall  of  the 
whole  system. 

Another  interesting  example  of  the  difficulty  of  bringing 
about  a  change  in  rate  adjustment  is  afforded  in  the  trans- 
continental field.  For  some  years  a  general  agreement  seems 
to  have  been  adopted  as  a  sort  of  a  compromise  between  the 
various  conflicting  interests.  Under  present  conditions  Chi- 
cago and  all  points  east  of  the  Mississippi  from  Maine  to  Florida 
enjoy  precisely  the  same  rate  to  the  Pacific  coast.-  Chicago 
has  at  various  times  contended  before  the  Interstate  Com- 
merce Commission  for  graded  rates  which  should  recognize,  for 
instance,  that  being  1,200  miles  nearer  San  Francisco  than 

1  This  was  the  gist  of  the  complaint  in  the  Cincinnati  Freight  Bureau 
case;  pp.  248,  392  and  588,  infra.  ^  Chapters  XI  and  XIX,  infra. 


RATE  MAKING  PRACTICE  155 

Boston  on  the  basis  of  distance,  it  should  have  proportionately 
lower  freight  rates.  Apparently  some  of  the  transcontinental 
roads,  such  as  the  Great  Northern,  have  been  willing  to  make 
this  concession.  They  could  not,  however,  take  any  action 
without  first  obtaining  the  consent  of  every  railway  and  steam- 
ship company  with  which  they  compete.  Inasmuch  as  almost 
every  railway  in  the  country  participates  in  transcontinental 
business,  an  agreement  was  practically  impossible.  Entirely 
aside  from  the  merits  of  this  particular  intricate  question,  it 
must  be  borne  in  mind  that  there  is  no  such  thing  as  independ- 
ence of  action  on  behalf  of  any  single  carrier.  It  becomes 
exceedingly  easy  for  one  road  to  play  a  dog-in-the-manger 
part.  The  shipper  may  be  subjected  to  an  extortionate  policy, 
not  dictated  by  the  road  over  which  he  ships,  as  a  matter  of  fact, 
but  by  roads  operating  perhaps  a  thousand  or  more  miles  away. 

Praiseworthy  as  is  the  elasticity  of  railway  rates  in  the 
United  States,  there  is,  nevertheless,  much  to  be  said  in  support 
of  the  contention  that  at  times  this  has  been  carried  to  an 
extreme.  Stability  and  certainty  have  been  treated  as  of 
secondary  importance.  Particular  shippers  have  been  aided, 
but  the  general  interests  of  trade  have  suffered  some  injurious 
consequences.  It  is  not  entirely  clear  whether  the  advantage 
gained  from  elasticity  has  at  all  times  been  worth  the  cost. 
Certain  of  the  disadvantages  of  instability  of  rates  seem  to 
have  been  overlooked. 

In  the  first  place  railway  tariffs  have  in  the  past  undoubtedly 
been  too  voluminous  and  complex.  The  number  of  these  filed 
with  the  Interstate  Commerce  Commission  is  extremely  large. 
Eleven  railways  alone  during  the  year  to  November  30,  1904, 
filed  30,125.  The  total  schedules  of  all  American  railways 
filed  during  the  year  to  November  30,  1907,  was  220,982.  One 
single  carrier  had  15,700  tariffs  in  force  at  the  same  time.  The 
New  York  Central  &  Hudson  River  in  December,  1899,  had 
no  less  than  1,370  special  commodity  rates  in  force.  There 
were  endless  contradictions  and  conflicts.     Secret  rates  were 


156  RAILROADS 

hidden  in  devious  ways  in  this  mass  of  pubhcations.  Special 
tariffs  "expiring  with  this  shipment";  rates  quoted  not  numeri- 
cally but  by  numbered  reference  to  tariffs  of  other  carriers  and 
applicable  by  different  routes;  agreements  to  meet  rates  of  any 
competing  carriers,  were  among  the  irregular  methods  of  con- 
cealment adopted.  Although  literally  complying  with  the  law 
by  publicly  filing  all  tariffs,  conditions  were  often  such  that 
not  even  an  expert  in  rates  could  discover  in  this  maze  of  con- 
flicting evidence  what  the  rate  at  any  time  actually  was.  The 
door  was  opened  wide  to  personal  discrimination  and  abuses  of 
all  kinds.^  Those  conditions  are  not  necessary.  They  do  not 
obtain  on  the  best  roads  in  other  parts  of  the  world.  Nor  is 
such  instability  found  in  respect  of  some  important  lines  of 
trade.  No  agricultural  product  fluctuates  in  price  more  ab- 
ruptly or  widely  than  raw  cotton, — from  five  to  seventeen  cents 
a  pound.  Yet  the  rates  on  that  commodity  have  remained 
quite  undisturbed  throughout  the  southern  states  for  many 
years.  But  the  best  proof  of  all  that  rates  have  been  unduly 
numerous,  is  the  great  reduction  in  volume  which  has  taken 
place  since  1910  under  compulsion  of  law.  This  feature  will 
be  especially  considered  in  another  connection.^ 

The  second  disadvantage  of  too  great  elasticity  in  freight 
rates  is  that  it  may,  at  times,  promote  rather  than  lessen  that 
state  of  economic  unrest  inevitable  in  all  business,  especially 
in  a  new  country.  Under  a  continual  disturbance  of  rates,  the 
merchant  is  unable  with  security  to  enter  into  long-time  con- 
tracts. Rates  are  sometimes  changed,  not  to  suit  the  shipper 
but  to  serve  the  railway's  interests.  Sometimes  traffic  may  be 
diverted  from  its  natural  channels.  The  spirit  of  initiative 
and  self-reliance  on  the  part  of  shippers  may  be  undermined. 
Persistent  titillation  of  competition  may  be  pleasant  for  a  time, 
but  its  final  results  may  be  injurious.  Constant  appeal  to  the 
traffic  manager  of  his  road  for  aid  and  comfort  may  quite 

'  Now  covered  by  law  since  1910.     Pp.  512  and  571,  injra. 
2  Pp.  324  and  infra. 


RATE  MAKING  PRACTICE  157 

naturally  divert  the  shipper's  attention  from  an  aggressive 
commercial  policy  which  would  render  him  independent  of 
minor  changes  in  freight  rates.  The  more  responsibility  the 
traffic  manager  assumes,  the  more  may  be  put  upon  him.  And 
it  must  always  be  remembered  that  each  move  by  one  road  to 
protect  a  client,  will  probably  be  checkmated  by  the  tactics  of 
rival  lines.  Economic  peace,  not  warfare,  should  be  encouraged 
by  the  services  of  common  carriers.  One  of  the  positive  ad- 
vantages of  governmental  regulation  of  railway  rates  is  that 
it  contributes  to  stability.  That  this  view  is  shared  by  ex- 
perienced railway  men,  appears  from  the  following  testimony  of 
President  Mellen  of  the  New  Haven  road.^  "I  think  that  great 
trouble  comes  to  the  business  of  this  country  through  the  fact 
of  these  little  breaks  in  rates.  During  November  two  new  rail- 
ways w^ere  opened  into  the  city  of  Denver.  They  sought  to 
make  themselves  popular  by  lowering  rates,  and  rates  went 
dowTi  very  low.  They  went  down  legally,  but  they  went  doTvm 
very  low.  Just  before  the  rates  went  doTVoi  the  merchants 
of  the  city  had  stocked  Denver  with  goods  and  the  lowering  of 
the  rates  demoralized  their  prices;  they  lost  a  large  amount  of 
money,  and  dissatisfaction  was  caused  from  Chicago  to  Denver. 
Lowering  of  rates  demoralized  business  generally.  I  think 
if  those  roads  had  known  that  the  rates  which  they  made  had 
to  remain  in  force  thirty  days  they  would  have  hesitated  be- 
fore they  lowered  them.  I  would  increase  the  time  required 
before  rates  could  be  reduced." 

The  foregoing  consideration  suggests  still  another  argu- 
ment in  favor  of  stability  of  freight  rates,  even  at  the  expense 
of  a  certain  amount  of  flexibility.  Special  rates  which  create 
new  business  should  be  carefully  distinguished  from  special 
rates  which  merely  wrest  business  from  other  carriers  or  markets. 
Any  expedient  which  will  make  two  blades  of  grass  grow  where 
one  grew  before;    which  puts  American  wheat  into  Liverpool 

^  Senate  Committee  on  the  Transportation  Interests  of  the  United 
States  and  Canada,  1890,  p.  362. 


158  RAILROADS 

in  competition  with  India  and  Argentina;  which  cheapens 
Cahfornia  fruit  on  the  eastern  markets;  which  offers  a  wider 
choice  of  building  stone  for  Chicago;  which  will  establish  new 
industries  for  the  utilization  of  local  raw  materials,  deserves 
the  greatest  encouragement.  Our  country  has  been  unpre- 
cedently  developed  in  consequence  of  the  energy  and  pro- 
gressiveness  of  its  railway  managers.  But  thousands  of  other 
special  rates  have  no  such  justification,  even  where  they  are 
public  and  open  to  all  shippers  alike.  These  are  the  expression 
of  railway  ambition  to  build  up  trade  by  invading  territory 
naturally  tributary  to  other  railways  or  traders.  A  significant 
feature  of  commercial  competition  is  the  utilization  of  distant 
markets  as  available  ''dumping  grounds"  for  the  surplus  prod- 
ucts left  over  from  the  local  or  natural  market.  In  the  St. 
Louis  Business  Men's  League  case  ^  the  Pacific  coast  jobbers 
complained  that  the  large  distributing  houses  in  the  Middle 
West  thus  mvaded  their  territory.  Having  met  their  fixed 
charges  from  their  own  natural  territory,  they  invaded  the 
remotest  districts  by  cutting  prices  to  the  level  of  actual  pro- 
duction cost  per  unit  of  new  business.  The  Florida  orange 
growers  protest  against  the  relatively  lower  rate  on  California 
fruit,  which  is  carried  twice  the  distance  for  less  money  per 
box.  This,  it  is  urged,  enables  the  western  grower,  having 
glutted  his  natural  market  in  the  Middle  West,  to  "dump"  his 
surplus  into  the  eastern  field,  to  which  alone  the  Florida  orange 
is  restricted.  This  line  of  argument  is  the  same  as  that  which 
upholds  the  systems  under  which  lower  rates  are  given  for 
exported  or  imported  commodities  than  those  on  goods  for 
domestic  consumption.  It  is  always  alleged  that  such  sales 
at  long  reach  actually  benefit  the  consumer  or  producer  near 
at  hand,  inasmuch  as  they  contribute  something  toward  the 
fixed  expenses  of  the  business,  which  must  be  borne  in  any 
event.  This  raises  at  once  the  much  broader  question  as  to 
what  constitutes  a  "natural  market"  or  the  "natural  territory" 
1  9  Int.  Com.  Rep.,  318;  in  our  Railway  Problems,  chap.  XVII. 


RATE  MAKING  PRACTICE  159 

which  rightfully  belongs  to  any  given  economic  agent.     It  is, 
however,  too  extended  an  issue  to  be  discussed  at  this  time.^ 

Too  many  special  commodity  rates,  intended  to  meet  the 
needs  of  particular  shippers  instead  of  increasing  new  business, 
may  merely  bring  about  economic  waste  through  exchange 
between  widely  separated  markets  or  by  causing  an  invasion 
of  fields  naturally  tributary  to  other  centres.-  Whenever  a 
community  producing  a  surplus  of  a  given  commodity  supplies 
itself,  nevertheless,  with  that  same  commodity  from  a  distant 
market,  economic  loss  results.  Numerous  instances  could  be 
cited  where  identical  products  are  redistributed  after  a  long 
carriage  to  and  from  a  distant  point  in  the  very  area  of  original 
production.  Dried  fruits  may  be  distributed  by  wholesale 
grocers  at  Chicago  in  the  great  fruit-raising  regions  of  the 
West  and  South.  Cotton  goods  made  by  southern  mills  may 
be  shipped  to  New  York  or  Chicago,  and  then  sent  back  again 
for  final  distribution  with  the  addition  of  a  middleman's  com- 
mission and  a  double  freight  rate.  The  Colorado  Fuel  & 
Iron  Company  seeks  special  rates  in  order  to  sell  goods  over  in 
Pittsburg  territory;  while  its  great  competitor,  the  United 
States  Steel  Corporation,  has  an  equal  ambition  for  the  trade 
of  the  Pacific  Slope.  In  another  case  it  appeared  that  a  sash 
and  blind  manufacturer  in  Detroit  was  seeking  to  extend  his 
market  in  New  England.  Manufacturers  of  the  same  goods 
in  Vermont  were  simultaneously  marketing  their  product  in 
Michigan.  The  -Detroit  producer  did  not  complain  of  this 
invasion  of  his  home  territory,  but  objected  to  the  freight  rate 
from  Boston  to  Detroit,  which,  probably  because  of  back  load- 
ing, was  only  about  one-half  the  rate  on  his  own  goods  from 
Detroit  to  the  seaboard.  Is  not  this  an  economic  anomaly? 
Two  producers,  presumably  of  equal  efficiency,  are  each  invad- 
ing the  territory  naturally  tributary  to  the  other  and  are  en- 
abled to  do  so  by  reason  of  the  railway  policy  of  ''keeping 

1  Hammond,  Railway  Rate  Theories,  etc.,  1911,  p.  82,  cites  cases. 
^  Chapter  VIII,  infra. 


160  RAILROADS 

everyone  in  business."  The  New  England  railways  are  com- 
pelled by  reason  of  the  remoteness  to  their  territory  to  defend 
this  policy.  As  President  Tuttle,  of  the  Boston  &  Maine, 
expresses  it,  "I  should  be  just  as  much  interested  in  the  stim- 
ulating of  Chicago  manufacturers  in  sending  their  products 
into  New  England  to  sell  as  I  would  be  in  sending  those  from 
New  England  into  Chicago  to  sell.  It  is  the  business  of  the 
railways  centering  in  Chicago  to  send  the  products  from  Chi- 
cago in  every  direction.  It  is  our  particular  business  in  New 
England  to  send  New  England  products  all  over  the  country. 
The  more  they  scatter  the  better  it  is  for  the  railways.  The 
railway  does  not  discriminate  against  shipments  because  they 
are  east  bound  or  west  bound.  We  are  glad  to  see  the  same 
things  come  from  Chicago  into  New  England  that  are  manu- 
factured and  sent  from  New  England  into  Chicago."  No  one 
questions  for  a  moment  that  the  widening  of  the  sphere  of 
competition  by  transportation  agencies  is  a  service  of  incal- 
culable benefit  to  the  country.  But  it  should  also  be  borne  in 
mind  that  superfluous  transportation  is  economic  waste.  The 
industrial  combinations  in  seeking  to  effect  a  strategic  loca- 
tion of  their  factories  in  order  to  divide  the  field  have  appar- 
ently come  to  a  full  recognition  of  this  fact. 

A  fourth  objection  to  undue  development  of  special  com- 
modity rates  is  that  they  may  entail  increased  burdens  upon 
the  local  constituency  of  each  railway.  The  proportion  of 
such  special  rates  is  fifty  per  cent,  greater  in  America  than  in 
the  United  Kingdom.  It  is  plain  that  each  shipment  which 
fails  to  bear  its  due  proportion  of  fiixed  charges,  even  though 
contributing  something  thereto,  leaves  the  weight  of  interest 
and  maintenance  charges  upon  the  shoulders  of  the  local  shipper. 
To  be  sure,  those  special  rates  which  permanently  create  new 
business,  operate  otherwise.  But  in  the  vast  complex,  each 
railway  often  wrests  from  competing  carriers  only  about  as 
much  tonnage  as  it  loses.  It  invades  rival  territory,  but  its 
own  constituency   is   invaded   in  retaliation.     Thus  there   is 


RATE   MAKING  PRACTICE  161 

rolled  up  an  inordinately  large  proportion  of  such  special 
traffic,  leaving  the  regular  shipments  and  the  local  trade  to 
bear  the  brunt  of  fixed  charges.  Momentous  social  conse- 
quences may  result.  Not  only  the  cost  of  doing  business,  but 
the  expense  of  living  in  the  smaller  places  is  increased.  One 
of  the  most  dangerous  social  tendencies  at  the  present  time  is 
the  enormous  concentration  of  population  and  wealth  in  great 
cities.  Increased  efficiency  and  economy  in  production  are 
much  to  be  desired;  but  social  and  political  stability  must  not 
be  sacrificed  thereto.  Is  it  not  possible  that  a  powerful  de- 
centralizing influence  may  be  exerted  by  checking  this  indis- 
criminate and  often  wasteful  long-distance  competition,  through 
greater  insistence  upon  the  rights  of  geographical  location? 

Finally,  an  abnormal  disregard  of  distance,  which  is  always 
possible  in  the  making  of  special  rates  to  meet  particular  cases, 
may  bring  about  a  certain  inelasticity  of  industrial  conditions. 
This  may  occur  in  either  one  of  two  ways.  The  rise  of  new 
industries  may  be  hindered;  or  the  well-merited  relative  de- 
cline of  old  ones  under  a  process  of  natural  selection  may  be 
postponed  or  averted.  The  difficult  problem  of  fairly  adjust- 
ing rates  on  raw  materials  to  finished  products  in  order  that  the 
growth  of  new  industries  may  take  place,  while  at  the  same 
time  the  old  established  ones  shall  not  be  cramped  or  restricted, 
has  already  been  discussed.  It  is  equally  plain  that  at  times 
there  may  be  danger  of  perpetuating  an  industry  in  a  district, 
regardless  of  the  physical  disabilities  under  which  it  is  con- 
ducted. One  cannot  for  a  moment  doubt  the  advantages  of  a 
protective  policy  on  the  part  of  railways;  safe-guarding  in- 
dustry against  violent  dislocating  shocks.  An  inevitable  transi- 
tion to  new  and  perhaps  better  conditions  may  perhaps  be 
rendered  easier  to  bear.  To  New  England,  constantly  exposed 
to  the  competition  of  new  industries  rising  in  the  West,  this 
policy  has  been  of  inestimable  value.  On  the  other  hand,  it  is 
incontestable  that  in  the  long  run  the  whole  country  will  fare 
best  when  each  industry  is  prosecuted  in  the  most  favored 

VOL.  I — 11 


162  RAILROADS 

location,  conditions  of  marketing  as  well  as  of  mere  production 
being  always  considered.  If  Pittsburg  is  the  natural  centre 
for  iron  and  steel  production,  it  may  not  be  an  unmixed  ad- 
vantage to  the  country  at  large,  however  great  its  value  to 
New  England,  to  have  the  carriers  perpetuate  the  barbed  wire 
manufacturers  at  Worcester.  If  California  can  raise  a  finer 
or  more  marketable  variety  of  orange,  and  at  a  lower  cost, 
than  Florida,  it  would  be  a  backward  step  to  counteract  the 
natural  advantage  of  the  western  field  by  compelling  the  south- 
ern railways  to  reduce  their  rates  to  an  amount  equal  to  the 
disability  under  which  the  Florida  grower  works.  The  prin- 
ciple laid  down  by  the  so-called  "Bogue  differentials"  in  the 
lumber  trade  ^  bears  upon  this  point.  In  order  to  equalize 
conditions  between  a  large  number  of  lumbering  centres  send- 
ing their  products  to  a  common  market,  certain  differentials 
between  them  were  allowed  under  arbitration,  "to  enable  each 
line  to  place  its  fair  proportion  of  lumber  in  the  territory." 
Did  this  mean  that  the  disability  of  any  place  in  manufac- 
turing cost,  should  be  compensated  by  a  corresponding  reduc- 
tion in  the  ensuing  transportation  cost?  This  was  the  view  of 
some  of  the  carriers  who  were  zealous  to  keep  the  market  open 
to  all  on  equal  terms.  Yet  it  is  evident  that,  carried  beyond 
a  certain  point,  such  a  policy  would  not  only  nullify  all  ad- 
vantages of  geographical  location,  but  it  would  also  reverse 
the  process  of  natural  selection  and  of  survival  of  the  fittest, 
upon  which  all  industrial  progress  must  ultimately  depend. 
Each  particular  case,  however,  must  be  decided  on  its  merits. 
Our  purpose  is  not  to  pass  judgment  on  any  one,  but  merely 
to  call  attention  to  the  possible  effect  of  such  practices  upon 
the  process  of  industrial  development. 

Centralization,  or  concentration  of  population,  industry  and 

wealth  is  characteristic  of  all  progressive  peoples  at  the  present 

time.     Great  economic  advantages,  through  division  of  labor 

and  cheapened  production,  have  resulted;    but,  on  the  other 

'  5  Int.  Com.  Rep.,  2G4;  in  our  Railway  Problems,  chap.  VIII. 


RATE  MAKING  PRACTICE  163 

hand,  manifold  evils  have  followed  in  its  train.  Sometimes  it 
appears  as  if  American  railway  practices,  in  granting  com- 
modity and  flat  long-distance  rates  so  freely,  operated  in  some 
ways  to  retard  this  tendency.  But  the  influence  is  not  all  in 
that  direction.  Many  staple  industries,  utilizing  the  raw  ma- 
terial at  their  doors,  might  supply  the  needs  of  their  several 
local  constituencies,  were  it  not  that  their  rise  is  prevented 
by  long-distance  rates  from  remote  but  larger  centres  of  pro- 
duction, Denver,  in  striving  to  establish  paper  mills  to  utilize 
its  own  Colorado  wood  pulp,  is  threatened  by  the  low  rates 
from  Wisconsin  centres.  Each  localit}^  ambitious  to  become 
self-supporting,  is  hindered  by  the  persistency  of  competition 
from  far  away  cities.  This  is  particularly  true  of  distributive 
business.  The  overweening  ambition  of  the  great  cities  to 
monopolize  the  jobbing  trade,  regardless  of  distance,  has  already 
been  discussed.  And  it  follows,  of  course,  that  the  larger  the 
city  the  more  forcibly  may  it  press  its  demands  upon  the  car- 
riers for  low  rates  to  the  most  remote  hamlets.  The  files  of 
the  Interstate  Commerce  Commission  are  stocked  with  examples 
of  this  kind.  The  plea  of  the  smaller  cities  and  the  agricul- 
tural states  —  Iowa,  for  example  —  for  a  right  to  share  in  the 
jobbing  naturally  tributary  to  them  by  reason  of  their  location, 
formed  no  inconsiderable  element  in  the  recent  popular  demand 
for  legislation  by  the  Federal  government. 

The  marked  difference  between  competition  in  transporta- 
tion and  trade  has  long  been  recognized  in  economic  writing, 
but  has  not  as  yet  been  accorded  due  weight  in  law.  The  most 
essential  difference  arises  from  the  fact,  already  fully  set  forth, 
that  a  large  proportion  of  railway  expenditures  are  entirely 
independent  of  the  amount  of  business  done.  This  involves 
as  a  consequence,  the  exemption  of  carriers  from  the  funda- 
mental law  of  evolution.  Survival  of  the  fittest  does  not 
obtain  as  a  rule  in  railway  competition.  The  poorest  equipped, 
the  most  circuitous  and  most  nearly  insolvent  road  is  often 
able  to  dictate  terms  to  the  standard  and  most  direct  trunk 


164  RAILROADS 

lines.  This  has  been  exemphfied  time  and  again  in  the  history 
of  rate  wars  the  world  over.^  The  bankrupt  road  having  re- 
pudiated its  fixed  charges  has  nothing  to  lose  by  carrying 
business  at  any  figure  which  will  pay  the  mere  cost  of  haulage. 
The  indirect  line  having  no  business  at  the  outset  has  nothing 
to  lose,  and  everything  to  gain.  The  Canadian  Pacific,  for 
example,  was  perhaps  originally  built  without  any  expectation 
of  being  able  to  participate  in  San  Francisco  business;  and 
yet,  like  the  Grand  Trunk,  it  has  always  been  an  active  factor 
in  the  determination  of  transcontinental  tariffs. 

The  fact  is  that  cost  of  production,  while  in  trade  fixing  a 
point  below  which  people  may  refuse  to  produce  or  compete,  in 
transportation  may  merely  mark  the  point  at  which  it  becomes 
more  wasteful  to  stop  producing  than  to  go  on  producing  at  a 
loss.  Hadley's  classic  statement  is  so  admirable  that  it  can- 
not be  improved  upon.  "Let  us  take  an  instance  from  rail- 
way business,  here  made  artificially  simple  for  the  sake  of 
clearness,  but  in  its  complicated  forms  occurring  every  day. 
A  railway  connects  two  places  not  far  apart,  and  carries  from 
one  to  the  other  (say)  100,000  tons  of  freight  a  month  at  twenty- 
five  cents  a  ton.  Of  the  $25,000  thus  earned,  $10,000  is  paid 
out  for  the  actual  expenses  of  running  the  trains  and  loading 
or  unloading  the  cars;  $5000  for  repairs  and  general  expenses; 
the  remaining  $10,000  pays  the  interest  on  the  cost  of  con- 
struction. Only  the  first  of  these  items  varies  in  proportion 
to  the  amount  of  business  done;  the  interest  is  a  fixed  charge, 
and  the  repairs  have  to  be  made  with  almost  equal  rapidity, 
whether  the  material  wears  out,  rusts  out,  or  washes  out.  Now 
suppose  a  parallel  road  is  built,  and  in  order  to  secure  some 
of  this  business  offers  to  take  it  at  twenty  cents  a  ton.  The 
old  road  must  meet  the  reduction  in  order  not  to  lose  its  busi- 
ness, even  though  the  new  figure  does  not  leave  it  a  fair  profit 
on  its  investment;  better  a  moderate  profit  than  none  at  all. 
The  new  road  reduces  to  fifteen  cents;  so  does  the  old  road. 
1  Cf.  p.  255  et  seq.,  infra. 


RATE  MAKING  PRACTICE  165 

A  fifteen  cent  rate  will  not  pay  interest  unless  there  are  new 
business  conditions  developed  by  it;  but  it  will  pay  for  repairs, 
which  otherwise  would  be  a  dead  loss.  The  new  road  makes  a 
still  further  reduction  to  eleven  cents.  This  will  do  little  to- 
ward paying  repairs,  but  that  little  is  better  than  nothing.  If 
you  take  at  eleven  cents  freight  that  cost  you  twenty-five  cents 
to  handle,  you  lose  fourteen  cents  on  every  ton  you  carry.  If 
you  refuse  to  take  it  at  that  rate,  you  lose  fifteen  cents  on  every 
ton  you  do  not  carry.  For  your  charges  for  interest  and  repairs 
run  on,  while  the  other  road  gets  the  business."  ^ 

Another  peculiarity  of  railway  competition,  distinguishing 
it  from  competition  in  trade,  is  that  there  is  no  such  thing  as 
abandonment  of  the  field.  This  is  tersely  expressed  by  Mora- 
wetz  in  his  Corporation  Law.  "It  should  be  observed  that 
competition  among  railway  companies  has  not  the  same  safe- 
guard as  competition  in  trade.  Persons  will  ordinarily  do  busi- 
ness only  when  they  see  a  fair  chance  of  profit,  and  if  press 
of  competition  renders  a  particular  trade  unprofitable,  those 
engaged  in  that  trade  will  suspend  or  reduce  their  operations, 
and  apply  their  capital  or  labor  to  other  uses  until  a  reasonable 
margin  of  profit  is  reached.  But  the  capital  invested  in  the  con- 
struction of  a  railway  cannot  be  withdrawn  when  competition 
renders  the  operation  of  the  road  unprofitable.  A  railway  is 
of  no  use  except  for  railway  purposes,  and  if  the  operation  of 
the  road  were  stopped,  the  capital  invested  in  its  construction 
would  be  wholly  lost.  Hence  it  is  for  the  interest  of  the  rail- 
way company  to  operate  its  road,  though  the  earnings  are 
barely  sufficient  to  pay  the  operating  expenses.  The  o-^vner- 
ship  of  the  road  may  pass  from  the  shareholders  to  the  bond- 
holders, and  be  of  no  profit  to  the  latter;  but  the  struggle  for 
traffic  will  continue  so  long  as  the  means  of  paying  operating 
expenses  can  be  raised.     Unrestricted  competition  will  thus 

^  A  carload  of  bamboo  steamer  chairs  from  San  Francisco  to  New  York 
for  $9.40  in  the  course  of  a  rate  war,  would  seem  to  be  rather  below  bed- 
rock.    21  I.C.C.  Rep.,  349. 


166  RAILROADS 

render  the  competitive  traffic  wholly  imremunerative,  and  will 
cause  the  ultimate  bankruptcy  of  the  companies  unless  the 
operation  of  their  traffic  which  is  not  the  subject  of  competi- 
tion can  be  made  to  bear  the  entire  burden  of  the  interest  and 
fixed  charges."  So  profoundly  modified  in  short  are  the  con- 
ditions of  railway  competition  by  contrast  with  those  in  indus- 
try, that  it  is  clear  beyond  a  shadow  of  doubt  that  a  railway 
is  essentially  a  monopoly.  This  •  requires  no  proof  so  far  as 
local  business,  in  distinction  from  through  or  competitive  traffic, 
is  concerned.  It  is  equally  true  in  respect  to  all  traffic  of 
sufficient  importance  to  bring  about  pooling  agreements  or  a 
division  of  the  business,  in  order  to  forfend  bankruptcy  and 
consolidation.  To  attempt  to  perpetuate  competition  between 
railways  by  legislation  is  thus  defeating  its  own  end.  The 
prohibition  of  pooling  agreements  which  refuses  to  recognize 
the  naturally  monopolistic  character  of  the  business,  can  have 
but  one  result,  namely,  to  compel  consolidation  as  a  measure 
of  self-preservation.  Such  legislation  defeats  itself,  bringing 
about  the  very  result  it  was  intended  to  prevent. 

Two  general  theories  governing  the  rates  chargeable  by  rail- 
ways are  entertained,  known  respectively  as  cost  of  service  and 
value  of  service.  According  to  the  first,  the  proper  rate  for 
transportation  should  be  based  upon  the  cost  for  carriage  of 
the  persons  or  goods,  with  an  allowance  for  a  reasonable  profit 
over  and  above  the  expenses  of  operation  involved.  This  line 
of  argument  is  commonly  advanced  by  representatives  of 
shippers  and  the  public,  who  reason  by  analogy  from  other 
lines  of  business.  In  several  European  countries  when  rail- 
ways were  first  built,  and  afterward,  especially  in  Germany  in 
1867,  attempts  were  made  to  apply  this  principle  widely  in  the 
construction  of  tariffs.  Practical  railway  men,  on  the  other 
hand,  usually  adhere  to  the  second  principle  of  value  of  service. 
This  argument  maintains  that,  while  theoretically  cost  of 
service  should  determine  minimum  rates,  owing  to  the  nature 


RATE  MAKING  PRACTICE  167 

of  commercial  competition,  as  a  matter  of  fact  rates  must  be 
based  upon  the  principle  of  charging  what  the  traffic  will  bear. 
This  is  accomplished  by  proportioning  the  rate  to  the  com- 
mercial value  of  the  service.  Practically  the  rate  is  found  by 
charging  as  much  as  the  traffic  will  stand  without  evidence  of 
discouragement.  Thus  if  the  price  per  bushel  of  wheat  in 
New  York  is  twenty-five  cents  higher  than  in  Chicago,  it  would 
obviously  be  absurd  to  charge  a  rate  which  would  absorb  all 
of  that  increment  of  place  value  due  to  transportation.  Enough 
margin  must  be  left  to  the  shipper  who  buys  wheat  in  Chicago 
and  sells  it  in  New  York,  to  permit  a  reasonable  profit  on  the 
transaction,  after  payment  of  the  freight  rate. 

These  two  principles  of  cost  of  service  and  value  of  service 
are  directly  opposed  in  one  regard;  inasmuch  as  the  cost  of 
service  theory  harks  directly  back  to  railway  expenditure; 
while  the  value  of  service  principle  contemplates  primarily  the 
effect  upon  the  railway's  income  account.  Any  charge  is 
justified  according  to  the  latter  view,  which  is  not  detrimental 
to  the  shipper  as  indicated  by  a  positive  reduction  in  the  vol- 
ume of  business  offered.  No  charge,  on  the  other  hand,  may 
be  deemed  reasonable  according  to  the  cost  of  service  prin- 
ciple, which  affords  more  than  a  fair  profit  upon  the  business, 
regardless  of  its  effect  upon  the  shipper.  As  a  matter  of  fact 
neither  of  these  views  is  entirely  sound  by  itself.  Both  have 
large  elements  of  truth  in  them.  Each  qualifies  the  other.  In 
the  first  place,  it  is  to  be  noted  that  between  them  they  fix  the 
upper  and  lower  limits  of  all  possible  charges.  Less  than  the 
cost  of  service  camiot  be  charged;  else  would  a  confiscatory 
rate  result.  This  was  the  plea  set  up  by  the  railways  in  the  now 
celebrated  Texas  Cattle  Raisers'  Association  case  against  the 
cancellation  by  the  Interstate  Commerce  Commission  of  an 
extra  charge  of  SI  per  car  for  switching  charges  at  Chicago. 
At  the  other  extreme,  more  than  the  traffic  will  bear  cannot  be 
charged  without  a  disproportionate  decline  in  volume  of  ton- 
nage.    This  would  be  bad  business  policy,  as  it  could  at  once 


168  RAILROADS 

entail  loss  of  revenue.  The  railway  could  not  submit  to  the 
former  alternative;  it  would  not  conceivably  resort  to  the  latter. 

Attempts  have  been  made  by  various  authors  to  account  for 
the  phenomena  of  rate  making  on  other  grounds.  The  Ger- 
man author,  Sax,  has  sought  to  trace  an  analogy  between  the 
imposition  of  taxes  and  railway  charges,  alleging  that  both 
should  be  proportioned  to  what  the  shipper  "can  afford  to 
pay,"  from  an  ethical  rather  than  an  economic  point  of  view. 
Ac  worth  interprets  the  phrase  "charging  what  the  traffic  will 
bear"  to  mean  something  analogous  to  this.  His  allegation  is 
that  rate  schedules  are  built  up  upon  the  principle  of  "equality 
of  sacrifice,"  otherwise  characterized  as  "tempering  the  wind  to 
the  shorn  lamb."  High  class  traffic  contributes  liberally  of  its 
abundance  of  value,  while  third  class  passengers  and  low 
grade  tonnage  are  let  off  lightly  on  the  ground  of  their  poverty. 
Taussig  in  his  memorable  contribution  to  the  subject  ^  has, 
however,  shown  how  untenable  this  theory  of  "equality  of 
sacrifice"  is.  Not  ethical  but  purely  economic  considerations 
are  applicable  in  such  circumstances  except,  of  course,  in  so  far 
as  common  carriers,  enjoying  privileges  by  grant  of  the  state, 
may  be  considered  as  imposing  taxes  for  the  performance  of  a 
quasi-public  duty.  This  latter  test  of  a  reasonable  rate  has 
underlaid  a  long  line  of  Supreme  Court  decisions  since  the 
Granger  case.^  Nevertheless,  as  so  frequently  happens,  legal 
and  economic  bases  of  judgment  seem  to  be  lacking  in  harmony. 

There  can  be  no  question  that  for  an  indispensable  public 
service  like  transportation,  conducted  under  monopolistic  con- 
ditions, the  ideal  system  of  charges  would  be  to  ascertain  the 
cost  of  each  service  rendered  and  to  allow  a  reasonable  margin 
of  profit  over  and  above  this  amount.  To  the  application  of 
this  principle  alone,  however,  there  are  several  insuperable  ob- 
jections both  theoretical  and  practical.     Such  cost  is  practi- 

'  Quarterly  Journal  of  Economics,  V,  1891,  pp.  438-65;  reprinted  in 
Railway  Problems,  chap.  V. 

2  Cf.  Int.  Com.  Reports,  1903,  p.  436. 


RATE  IVIAKING  PRACTICE  169 

cally  indeterminate,  being  joint  for  all  services  in  large  part,  as 
we  have  seen:  it  is  highly  variable,  being  perhaps  never  twice 
the  same,  as  circumstances  change  from  time  to  time;  cost  is 
unknown  until  volume  is  ascertained,  and  volume  is  ever 
fluctuating;  the  cost  of  service,  obviously,  could  never  be  ascer- 
tained until  after  the  service  had  been  rendered,  while,  of 
course,  the  schedule  of  rates  must  be  known  in  advance,  in 
order  that  the  shipper  may  calculate  his  probable  profits;  and 
finally  the  principle  of  increasing  returns,  flowing  from  the 
dependence  of  cost  upon  volume  of  traffic,  imposes  such  an 
incentive  for  development  of  new  business,  which  in  turn  de- 
pends for  its  volume  upon  the  rate  charged,  that  cost  of  service 
is  subordinated  at  once  to  other  considerations  in  practice. 

Of  these  objections  to  rate  making  upon  the  principle  of 
cost  of  service  alone,  it  would  indeed  appear  as  if  the  first 
should  be  conclusive.  If  the  cost  is  simply  indeterminable, 
why  bother  about  any  further  refutation  of  the  principle  at 
all?  But  the  persistency  of  the  idea  that  somehow  railway 
operations  are  analogous  to  the  business  of  an  ordinary  mer- 
chant; and  that  cost  and  profits  are  ascertainable;  renders 
it  necessary  to  pile  proof  upon  proof  of  the  limitations  upon  its 
applicability  to  real  conditions  in  service. 

Not  only  is  the  mere  cost  of  service  indeterminable;  if  it 
could  be  ascertained,  it  would  not  establish  the  chargeable  rate 
in  many  instances.  The  freight  service  of  a  railway  comprises 
the  carriage  of  all  kinds  of  goods  simultaneously,  from  the 
most  valuable  high-priced  commodities,  such  as  silks  and 
satins,  down  to  lumber,  coal,  cement,  and  even  sand.^  To 
compel  each  of  these  classes  of  goods  to  bear  its  proportionate 
share  of  the  cost  of  carriage,  would  at  once  preclude  the  possi- 
bility of  transporting  low-priced  goods  at  all.  One  dollar 
a  hundred  pounds  may  not  be  too  much  to  add  to  the  price  of 
boots  and  shoes  for  transportation  from  Boston  to  Chicago. 

1  The  Hepburn  Committee  testimony  in  1879,  p.  2893,  is  eloquent 
upon  this  aspect  of  the  question. 


170  RAILROADS 

It  would  still  form  only  a  small  part  of  the  total  cost  of  produc- 
ing and  marketing  them.     But  to  add  anything  like  that  sum 
to  the  cost  of  one  hundred  pounds  of  salt  or  cement  would  put 
an  end  to  the  business  at  once.     Only  about  so  much  can  in 
practice  be  added  to  the  price  of  any  given  commodity  for 
freight  without  widely  limiting  the  area  of  its  available  market. 
Thus  raw  cotton  seems  to  be  able  to  bear  an  addition  of  about 
fifty  cents  per  hundred  pounds  for  freight  to  its  total  cost. 
Experience  demonstrates  that  anything  more  than  this  one- 
half  cent  per  pound  charged  on  cotton,  entails  more  loss  than 
gain.     In  the  case  of  fancy  groceries  or  fine  furniture,  there 
may  be  no  considerable  demand  in  any  event  above  a  certain 
ascertainable  level  of  prices.     For  boots  and  shoes  or  cut  build- 
ing stone  it  may  be  that  competition  from  some  other  centre 
of  production   nearby,   precludes  any   great  addition  to  the 
price  for  freight.     The  business  simply  will  not  bear  more 
than  a  certain  proportion  of  charge.     Not  only  would  the 
rigid  application  of  the  cost  of  service  principle  hinder  all  trans- 
portation of  low-grade  traffic;    it  would  also  prevent  any  de- 
velopment of  long  distance  business.     It  is  indubitable  that 
sole  reliance  upon  cost  of  service  as  a  basis  for  rate  making  is 
theoretically  unsound,  and  impossible  of  practical  application.^ 
Cost  of  service,  while  unsound  as  a  sole  reliance,  neverthe- 
less affords  an  important  check  upon  the  value  of  service  prin- 
ciple.    Without  it  there  is  always  grave  danger  that  traffic 
managers,  seeking  to  enlarge  their  revenues,  may  push  rates 
unreasonably  high.     At  first  sight  it  would  appear  as  if  this 
could  not  occur,  inasmuch  as  an  inordinately  high  rate  would 
immediately  reduce  the  volume  of  business  offered.     It  is  con- 
stantly alleged  by  railway  men  that  this  must  of  necessity 
occur.     And  it  would  indeed  follow,  were  it  not  that  the  inci- 
dence of  the  rate  is  rarely  upon  the  actual  shipper.     He  merely 
pays  it,  and  at  once  shifts  it  to  the  consumer.     For  low-grade 

1  Ist  Annual  Report,  I.C.C,  1888.      C/.  Strombeck,  Freight  Classifi- 
cation, pp.  3.5-60. 


RATE  MAKING  PRACTICE  171 

or  staple  goods  like  cement  or  kerosene,  where  transporta- 
tion charges  form  a  large  part  of  the  total  cost  of  production, 
it  is  conceivable  that  higher  freight  rates  might  so  far  increase 
the  price  as  to  check  consumption.  Five  cents  a  hundred- 
weight higher  freight  means  $1.25  per  1,000  ft.  added  to  the 
price  of  soft  lumber,  $2  to  hard  lumber;  three  cents  per  bushel 
added  to  the  price  of  wheat,  and  $1  to  the  ton  of  pig  iron  or 
coal.  Such  substantial  additions  might  readily  reduce  the 
demand.  Yet  even  this  would  not  be  true  of  necessities  of 
life  like  anthracite  coal  or  sugar,  on  which  latter  the  freight 
rate  amounts  to  about  one-half  cent  per  pound.  Is  five  cents 
a  barrel  added  to  the  price  of  flour  likely  to  decrease  the  con- 
sumption of  that  staple  commodity?  Yet  the  enhancement  of 
railway  revenues  would  indeed  be  enormous  from  such  an  in- 
crease of  freight  rates.  For  these  necessities  of  life,  an  in- 
creased freight  rate  might  become  an  actual  charge  upon  the 
people,  without  reducing  their  consumption,  like  a  tax  upon 
salt.  Only  upon  goods  the  use  of  which  might  be  freely  lessened, 
would  higher  freight  rates  be  reflected  in  a  corresponding 
decline  in  the  volume  of  business.  Moreover,  with  all  high 
grade  traffic,  the  value  of  service  principle  fails  utterly  by 
itself  alone  to  prescribe  the  upper  level  of  a  reasonable  charge. 
Competent  testimony  is  ample  upon  this  point.  Thus  from 
the  commissioner  of  the  Trunk  Line  Association;  ^  "The 
tonnage  of  the  higher  class  articles  is  an  extremely  difficult 
matter  for  transportation  companies  to  increase  or  decrease. 
...  In  that  class  of  articles  the  carrier  can  do  but  little 
to  increase  the  transportation."  And  the  reason  in  part  lies  in 
the  almost  immediate  diffusion  of  the  burden  in  the  processes 
of  distribution.  That  no  complaints  are  made  —  a  defence 
often  brought  forward  for  higher  rates  —  proves  by  itself 
the  uncertain  incidence  of  the  burden  imposed. 

That  the  principle  of  charging  what  the  traffic  will  bear 
affords  no  protection  to  the  consumer  against  exorbitant  rates 
1  C,  N.  O.  &  T.  P.  case,  testimony,  vol.  II,  pp.  332-333. 


172  RAILROADS 

on  many  commodities,  follows  also  from  the  relative  insig- 
nificance of  transportation  charges  as  compared  with  the  value 
of  the  goods.  This,  in  fact,  is  naively  conceded  by  railway 
managers  themselves;  when,  as  in  the  case  of  the  widespread 
freight  rate  advances  of  1908-1909,  publicity  agents  flooded  the 
country  with  calculations  as  to  the  infinitesimal  fraction  which 
would  be  added  to  the  price  of  commodities  by  a  ten  per  cent, 
rise  in  rates. ^  The  rate  from  Grand  Rapids  to  Chicago  on  an 
ordinary  dining  room  set  of  furniture,  being  $1.60,  a  ten  per 
cent,  increase  would  add  only  sixteen  cents  to  the  cost.  A 
harvester  transported  one  hundred  miles  would  be  enhanced 
seventeen  and  a  half  cents  in  price;  a  kitchen  stove  carried  from 
Detroit  to  the  Mississippi  would  only  cost  twenty-five  cents 
more;  and  the  price  of  a  Michigan  refrigerator  sold  in  New  York, 
would  be  only  seven  and  one-half  cents  higher;  were  freight 
rates  to  be  increased  by  ten  per  cent,  in  each  instance.  On 
wearing  apparel  the  proportions  were  represented  as  even 
more  striking.  An  ordinary  suit  of  clothes  transported  three 
hundred  miles,  under  similarly  enhanced  rates,  would,  it  was 
alleged,  cost  only  one-third  of  a  cent  more.  For  all  their 
apparel,  made  in  New  England,  consisting  of  everything  from 
hats  to  shoes,  each  wearer  in  the  Middle  West  would  be  affected 
by  a  ten  per  cent,  rise  of  rates  by  less  than  one  cent  apiece. 
True  enough  all  this;  and  a  striking  testimonial  to  the  effec- 
tiveness of  the  railway  service  of  the  country!  But  at  the 
same  time,  if  a  ten  per  cent,  increase  of  rates  is  inappreciable 
to  the  consumer,  why  not  increase  them  by  twenty  per  cent.^ 

1  CJ.  The  Freight  Rate  Primer,  bearing  no  authors  or  publishers  name, 
but  largely  compiled  from  addresses  by  President  W.  C.  Brown  of  the  New 
York  Central  &  Hudson  River.  Similar  arguments  and  computations 
occur  in  the  testimony  before  the  Senate  (Elkins)  Committee  of  1905,  pp. 
1162  and  2276. 

2  Now  who  will  say  that  it  is  unreasonable  to  charge  7\  cts.  to  carry  a 
suit  of  clothes  from  Chicago  to  New  York.  .  .  .  Railways  could  charge 
three  or  four  times  the  cost  of  transportat  ion  for  a  pair  of  drawers  and  the 
rates  would  still  be  reasonable.  .  .  .  But  all  the  first-class  rates  are  of  that 
nature.  —  Albert  Fink,  testimony,  C,  N.  O.  &  T.  P.  case,  p.  290. 


RATE   MAKING  PRACTICE  173 

And  what  becomes  of  the  argument  that  charging  rates  ac- 
cording to  what  the  traffic  will  bear,  is  an  ample  safeguard 
against  extortion?  Many  of  these  small  changes  in  price  are 
diffused  in  the  friction  of  retail  trade;  '  some  of  them  are  un- 
fortunately magnified  to  the  consumer,  especially  under  con- 
ditions of  monopoly.  When  freight  rates  on  beef  go  up  ten 
cents  per  hundredweight,  the  consumers'  price  is  more  likely 
than  not  to  rise  by  ten  times  that  amount.  But  even  assum- 
ing the  final  cost  to  follow  the  range  of  transportation  charges 
closely,  is  it  not  evident  that,  so  small  relatively  are  many 
freight  charges  by  comparison  with  other  costs  of  production, 
that  consumption  is  not  proportionately  affected  by  their 
movement  one  way  or  the  other?  And  yet  the  entire  argument 
that  the  value  of  service  principle  is  a  self-governing  engine 
against  unreasonable  rates,  is  based  upon  this  assumption. 
Surely  the  increased  income  to  the  carriers  when  rates  are 
raised  must  come  from  someone.  Because  it  is  not  felt,  is  no 
reason  for  denying  its  existence  as  a  tax.  But  the  very  fact 
that  it  is  not  felt,  undermines  the  argument  that  a  safeguard 
against  extortion  obtains.  The  theorem  that  value  of  service 
in  itself  affords  a  reliable  basis  for  rate  making,  pre-supposes 
that  freight  rates  and  prices  move  in  unison;  a  supposition 
which  a  moment's  consideration  shows  to  be  untenable  in 
fact.2  Such  cases  must  be  finally  settled  by  some  reference, 
indefinite  though  it  be,  to  the  cost  of  conducting  that  particu- 
lar service;  or  rather,  as  Lorenz  puts  it,  to  the  extra  cost  inci- 
dent to  that  service.  This  extra  cost  may  oftentimes  be 
segregated,  where  the  total   cost  could  not  be  ascertained.^ 

1  Senate  (Elkins)  Committee,  1905,  p.  1162. 

2  In  re  Proposed  Advances  in  Freight  Rates,  I.C.C.,  April  1,  1903. 

2  An  interesting  illustration  of  such  determination  of  separable  or  extra 
cost  was  the  computation  by  which  the  movement  expenses  of  a  train  load 
of  50  cars  of  grain,  80,000  lbs.  to  the  car,  from  Buffalo  to  New  York  were 
fixed  at  $520.  I.  C.  C.  Reports,  1903,  p.  397.  Or  again  in  the  estimation  of 
the  costs  of  operation  in  the  express  service  from  New  Orleans  to  Kansas 
City  in  the  banana  trade.  I.  C.  C.  Rep.,  No.  1235, 190S.  The  able  Wiscon- 
sin Railroad  Commission  has  carefully  studied  a  number  of  such  cases, 
notable  in  its  Two-Cent  Fare  decision  of  1906. 


174  RAILROADS 

That  the  problem  is,  however,  a  most  difl&cult  one  is  evidenced 
by  the  periodic  controversies  over  railway  mail  pay.^ 

Of  course  in  order  that  any  change  of  rates  should  be  re- 
flected in  prices,  all  carriers  must  of  necessity  agree  upon  the 
matter.  The  price  is  made  by  the  least  expensive  source  of 
supply.  So  that  any  carrier  refusing  to  raise  rates,  might  aid 
in  the  continuance  of  an  already  established  price.  Under 
conditions  of  transportation  prevalent  in  the  United  States 
twenty  years  ago,  the  likelihood  of  an  increased  freight  rate 
becoming  a  tax  upon  the  community,  was  lessened  by  the 
probability  that  either  by  means  of  secret  rebates,  or  by  special 
and  perhaps  open  commodity  rates,  some  roads  might  choose 
to  protect  their  clients  against  enhancement  of  prices.  Markets 
were  local  —  not  reached  by  great  systems  operating  from  re- 
mote sources  of  supply.  The  policy  of  the  northern  trans- 
continental lines  in  making  lumber  rates  from  Oregon  to  the 
Middle  West,  might  be  quite  independent  of  any  policy  in  force 
on  the  southern  hard  pine  carrying  roads.  But  under  present 
day  conditions,  the  entire  area  of  the  United  States  is  one 
great  market.  Hence,  with  rebates  eliminated  and  with  prac- 
tical monopoly  established  through  actual  consolidation,  con- 
trol or  harmony  of  policy,  the  carriers  have  the  consumers 
much  more  completely  at  their  mercy.  Only  two  safeguards 
for  the  public  interest  remain.  One  is  government  regulation, 
or  at  all  events  supervision,  of  charges.  The  other  is  "en- 
lightened self-interest"  —  which  in  transportation  matters 
means  a  full  appreciation  of  the  possibilities  and  limitations 
in  the  application  of  the  value  of  service  principle  to  the 
determination  of  rates. 

Considerations  of  cost  of  service  afford  protection,  not  only 
against  unreasonably  high  rates,  but  also  against  unduly  low 
charges.  The  evil  in  such  cases  is  not  only  that  the  carriers 
operate  at  a  loss,  but  that  inequality  and  discrimination  are 
inevitable  concomitants  of  too  low  rates.  No  railway  con- 
1  C/.  Tunell,  Railway  Mail  Service,  Chicago,  1901. 


RATE  MAKING  PRACTICE  175 

ceivably,  of  course,  will  charge  unremunerative  rates  for  a  long 
time.  But  it  sometimes  happens  that  managements  may  be 
led  to  the  adoption  of  policies  of  temporary  expediency,  not 
compatible  with  the  long-time  welfare  of  stockholders.  During 
the  presidency  of  Charles  Francis  Adams  on  the  Northern 
Pacific  in  1890  an  unaccountable  and  unnatural  diversion  of 
traffic  from  this  road  to  the  Atchison,  Topeka  &  Santa  Fe 
suddenly  occurred.^  A  large  volume  of  freight  from  the  East 
to  Oregon  was  diverted  to  the  round-about  route  via  Southern 
California.  On  investigation  it  appeared  that  the  English 
banking  house  of  Baring  Brothers,  having  become  involved  in 
unfortunate  Argentine  speculation,  and  being  obliged  to  force 
a  market  for  its  investments  in  Atchison  securities,  demanded 
an  immediate  showing  of  large  gross  earnings  regardless  of  the 
net  profits.  Orders  to  get  traffic  at  any  price  went  forth.  A 
market  was  made  for  Atchison  stock;  although  it  was  power- 
less to  prevent  the  firm's  final  banki'uptcy.  In  such  a  case  the 
only  safeguard  against  unreasonably  depressed  rates  by  the 
Atchison  road,  which,  of  course,  immediately  compelled  corre- 
sponding reductions  by  the  natural  routes  to  the  Northwest, 
should  have  been  consideration  of  the  actual  cost  of  moving 
traffic  by  so  long  and  round-about  a  route.  And  yet  this  con- 
sideration was  entirely  ignored.  Another  illustration  of  the 
same  danger  occurred  in  April,  1903.'  A  gang  of  western 
speculators  unobtrusively  acquired  control  of  the  Louisville  & 
Nashville  road,  by  taking  advantage  of  the  issue  by  that  com- 
pany of  a  large  amount  of  new  stock.  This  they  did  by  the 
use  of  borrowed  money  They  had  no  intention,  even  had  they 
been  sufficiently  well  financed  to  do  so,  of  permanently  con- 
trolling the  road  as  an  investment.  They  bought  the  stock 
merely  in  order  to  resell  it  at  a  higher  figure.  They  threatened 
the  railway  world  with  a  general  disturbance  of  rate  condi- 
tions throughout  the  South.  Their  plan  was  to  cut  rates 
and  steal  traffic  from  other  roads  in  order  to  make  a  large  show 
^  Personal  correspondence.  ^  Details  in  vol.  II. 


176  RAILROADS 

of  gross  earnings;  and  to  unload  their  stock  holdings  on  the 
market  thus  made,  before  the  public  learned  the  truth.  This 
was  prevented  only  by  repurchase  of  their  stock  at  very  high 
prices.  In  such  a  case,  what  guidance  would  the  principle 
of  charging  what  the  traffic  would  bear,  afford?  Cost  of 
service  must  be  invoked  in  order  to  determine  the  reasonable- 
ness of  the  low  rates  in  force. 

In  any  industry  where  rates  are  made  under  conditions  of 
monopoly  rather  than  of  free  competition,  it  is  imperative 
that  cost  of  service  be  constantly  held  in  view.  Under  con- 
ditions of  free  competition  it  is  bound  to  obtrude  itself  auto- 
matically; but  under  monopoly  it  must  oftentimes  be  forcibly 
invoked.  The  shipper  whose  manufacturing  plant  has  once 
been  located  in  a  certain  place  is  no  longer  free  to  accept  or 
reject  a  certain  rate.  He  can  afford  neither  to  move  nor  to 
abandon  his  works.  In  order  to  continue  in  business  he  must 
meet  the  prices  made  by  competitors.  This  price  may  be  made 
elsewhere  under  more  favored  circumstances.  To  a  manufac- 
turer an  increase  of  freight  rates  instead  of  curtailing  output, 
may  lead  to  attempts  to  lessen  the  costs  of  production  per  unit 
by  an  enlarged  output  sold  at  cut  prices.  Under  such  con- 
ditions an  enhanced  freight  rate  is  a  positive  deduction  from 
profits  without  any  gain  to  the  consumer.  It  is  impossible  to 
trace  any  safeguard  against  extortion  in  the  operations  of  a 
value  of  service  law  under  such  circumstances.  An  instance 
in  point  is  afforded  by  a  complaint  of  the  Detroit  Chemical 
works  in  1908.^  This  company  imported  iron  pyrites  through 
Baltimore  from  Spain;  that  being  the  source  of  the  bulk  of  the 
material  used  here  in  the  manufacture  of  sulphuric  acid.  The 
Detroit  Company  sold  its  product  throughout  the  West  in 
competition  with  companies  at  St.  Louis,  Chicago  and  Buffalo. 
The  companies  at  Chicago  and  St.  Louis  enjoyed  low  import 
rates  by  way  of  the  Gulf  ports.  The  Buffalo  concern  used  to 
be  favored  by  a  low  rate  said  to  be  due  to  canal  competition  on 
1  13  I.C.C.  Rep.,  357. 


RATE  MAKING  PRACTICE  177 

shipments  from  New  York.  Since  1903,  however,  the  rate  on 
pyrites  from  Baltimore  to  Detroit  had  been  steadily  increasing, 
from  $1.56  to  $2.72  per  long  ton.  Even  this  latter  rate  by 
itself  does  not  seem  absolutely  excessive,  yielding  a  revenue 
of  less  than  four  mills  per  ton  mile.  But  here  again,  it  was  not 
the  absolute  but  the  relative  rate  upon  which  the  continued  wel- 
fare of  the  industrial  concern  depended.  The  question  had  to 
be  decided,  not  on  the  basis  of  cost,  but  from  the  point  of  view 
of  the  value  of  the  service  to  the  user.  The  carriers  after  this 
petition  was  filed  voluntarily  reduced  the  rate  fifty-one  cents 
per  ton  in  January,  1908.  The  relative  rate  as  compared  with 
that  to  other  competitive  points  was  thus  more  equitably  ad- 
justed. The  Interstate  Commerce  Commission  on  a  review  of 
the  evidence  held  that  this  increase  to  $2.72  was  unreasonable 
and  unjust  so  long  as  it  had  been  in  effect;  and  awarded  rep- 
aration to  the  amount  of  fifty-one  cents  per  ton  on  all  shipments 
made  during  its  continuance. 

It  is  indisputable  that  the  great  dynamic  force  in  railway 
operation  inheres  in  the  value  of  service  idea.  The  traffic  man- 
ager who  is  always  considering  how  much  it  will  cost  to  handle 
business,  will  seldom  adventure  into  new  territory.  The  United 
States,  as  a  rapidly  growing  country,  is  consequently  the  field 
in  which  charging  what  the  traffic  will  bear,  has  been  most 
ardently  upheld  as  the  only  practicable  basis  for  rate  making. 
A  few  detailed  illustrations  will  serve  to  show  the  results  of  its 
application  in  practice.  Not  infrequently  does  it  happen  that 
rates  are  different  over  the  same  line  for  shipments  between 
two  given  points  in  opposite  directions.  Where  this  is  due  to  a 
preponderance  of  traffic  in  one  direction,  and  a  consequent 
movement  of  "empties"  which  invite  a  back  loading  at  very 
low  rates,  the  difference  of  charges  according  to  direction  may 
actually  be  due  to  differences  in  the  cost  of  carriage.^  An 
empty  train,  which  must  be  returned  from  New  York  to  Chicago 
for  another  loading  of  grain,  or  to  Georgia  or  Oregon  for  ship- 
1  5  I.C.C.  Rep.,  299. 

VOL.  I — 12 


178  RAILROADS 

ments  of  lumber,  if  loaded  with  merchandise,  can  be  moved  with 
no  allowance  for  dead  weight  of  cars  or  locomotives;  inasmuch 
as  the  train  must  move  in  any  event,  whether  loaded  or  empty. 
But  even  where  this  defence  of  difference  in  the  cost  of  service 
fails,  the  practice  may  be  entirely  proper  from  every  point  of 
view.     By  increasing  the  total  tonnage  a  special  rate  may 
ultimately  contribute  to  lower  charges  all  along  the  line.     Raisin 
culture  began  in  California  in  1876.     Prior  to  that  time  the 
Spanish  product  had  supplied  the  American  market.     The  first 
thing  to  do  was  to  find  a  market  for  the  California  raisins  in  the 
East.     They  would  not  bear  the  freight  rate  which  had  pre- 
viously been   charged  for   Spanish   raisins  moving  over  the 
transcontinental   lines  westward.     A  very  low   rate  was   all 
that  the  new  traffic  would  bear.     During  the  year  1876  there- 
fore 70,000  lbs.  of  California  raisins  were  carried  east  at  one 
and   three-fourths    cents   per   100   lbs.,   while   simultaneously 
1,000,000  lbs.  of  Spanish  raisins  were  carried  west  over  the 
same  lines  at  a  rate  of  three  cents.     No  such  difference  in  the 
cost  of  service  in  opposite  directions  existed,  although  a  pre- 
ponderance of  empties  moving  eastward  undoubtedly  cheapened 
the  service  from  California.     The  aim  of  the  commodity  rate 
was  to  upbuild  a  new  industry.     How  far  this  succeeded  appears 
from  the  fact  that  in  1891,  no  Spanish  raisins  were  carried  west 
at  all;  while  the  eastbound  shipments  amounted  to  37,600,000 
Ibs.^     The  preceding  illustration  leads  us  then  to  this  further 
conclusion.     The   cost  of  service  principle  might  most  con- 
ceivably be  applied  to  a  railway  in  a  purely  static  state.     But, 
dynamically  considered,  as  involving  the  growth  and  develop- 
ment of  business,  it  fails  utterly  by  itself  to  meet  the  necessities 
of  the  case. 

At  times  it  is  inevitable  that  cost  of  service  and  value  of 

service  considerations  come  flatly  into   opposition.     Usually, 

as  in  the  California  raisin  case  or  in  the  grant  of   low  rates 

on  Oregon  lumber  east  bound  about  1893,  they  reinforce  one 

^  On  raisins  compared  with  citrus  fruits:  22  I.C.C.  Rep.,  1. 


RATE  MAKING  PRACTICE  179 

another;  that  is  to  say,  the  lower  rat€  given  to  build  up  busi- 
ness obtains  on  a  service  given  at  lower  cost.  But  it  some- 
times happens  that  shipments  of  the  same  commodities  over  a 
line  in  opposite  directions  may  occur  and  that  the  lower  rate 
applies  to  the  (presumably)  more  costly  service.  In  1906 
a  manufacturer  in  Menasha,  Wis.,  complained  to  the  Inter- 
state Commerce  Commission  ^  that  his  rates  on  woodenware 
to  the  Pacific  slope  were  ten  cents  per  100  lbs.  higher  than  were 
rates  on  the  same  goods  between  the  same  points  east  bound, 
notwithstanding  the  fact  that  the  empty  car  mileage  west 
bound  was  then  three  times  as  great  as  in  the  contrary  direc- 
tion. The  movement  of  empties  west  bound  would  certainly 
seem  to  justify  as  low  if  not  lower  rates  on  the  basis  of  com- 
parative cost  of  operation,  supposing  that  there  was  coinci- 
dence in  time.  Only  one  satisfactory  explanation  for  this 
apparent  anomaly  suggests  itself;  viz.,  that  this  low  east- 
bound  rate  was  given  to  build  up  a  new  industry  in  the  West. 
In  other  words,  the  cost  of  service,  a  dependable  guide  for  a 
road  in  a  static  condition,  failed  of  effect  upon  a  line  possessed 
of  great  dynamic  possibilities.  Occasionally  opposition  of 
principles  like  this  may  occur  in  questions  of  classification.  It 
may  temporarily  be  worth  while,  in  order  to  build  up  a  new 
industry,  to  accord  a  lower  rating  to  a  commodity  actually 
more  valuable  or  more  expensive  to  handle  than  others.  Here 
again  the  dynamic  force  in  the  value  of  service  principle  out- 
weighs all  other  considerations  of  relative  cost  of  service. 

The  value  of  service  principle  in  general  fails,  not  onlj^  in 
the  determination  of  absolutely  reasonable  rates,  but  it  is  in- 
adequate also  to  the  solution  of  perhaps  the  more  difficult 
problem  of  relative  rates.  This  question  of  relativity  is  two- 
fold; first  as  between  different  places,  and  secondly  as  between 
different  commodities.  These  are,  in  other  words,  the  prob- 
lems respectively  of  distance  tariffs  and  of  classification.  The 
manner  in  which  distance  tariffs  evolve,  has  already  been  dis- 
1  Interstate  Commerce  Commission,  No.  797. 


180  RAILROADS 

cussed,  and  it  is  evident  that  the  cost  of  service  principle  is  of 
fundamental  importance,  even  though  it  be  tempered  by  con- 
siderations of  commercial  expediency,  that  is  to  say,  by  the 
necessity  of  at  all  times  under  stress  of  competition,  charging 
only  what  the  traffic  will  bear.  But  while  the  value  of  service 
principle  —  charging  according  to  demand  in  other  words  — 
applies  at  the  competitive  points,  the  other  principle  of  relative 
cost  should  be  the  fundamental  one  in  fixing  upon  the  scale 
of  local  non-competitive  rates. 

The  second  phase  of  the  problem  of  relativity  arises  in  con- 
nection with  classification.^  How  shall  goods  be  graded  in  re- 
spect of  their  freight  charges  for  identical  services  in  carriage? 
Besides  illustrating  the  interplay  of  the  two  fundamental 
principles,  this  topic  serves  also  to  clear  up  another  possible 
confusion  of  terms.  Proportioning  transportation  charges  to 
the  value  of  the  service  must  always  be  clearly  distinguished 
from  basing  them  upon  the  mere  value  of  the  goods.  Nothing 
is  more  certain  than  that  no  direct  causal  relation  between 
freight  rates  and  the  intrinsic  value  of  commodities  is  traceable. 
On  wire  the  freight  rate  between  two  given  points  may  be 
about  one-fourth  of  the  commercial  value;  on  sheet  iron  one- 
third;  on  lumber  somewhat  more,  and  on  hay  two-fifths; 
while  on  cattle  and  hogs  the  freight  rate  may  range  as  low  as 
one-tenth  to  one-eighth  of  their  commercial  value.  On  coal, 
on  the  other  hand,  the  freight  rate  often  more  than  equals  the 
price  of  the  coal  at  the  mine,  and  on  very  low  grade  commodi- 
ties like  bricks,  the  transportation  charges  may  equal  two  or 
even  three  times  the  worth  of  the  goods.^  For  each  locality  or 
even  direction,  these  percentages  will  change.  Positive  reasons 
for  these  varying  relationships  are  discernible  in  local  trade 
conditions.  While  in  general  cheap  goods  are  rated  lower; 
if  for  any  reason  —  bulkiness  or  risk  —  they  cost  relatively 

1  More  in  detail  in  chap.  IX. 

2  Senate  (Elkins)  Committee,  1905,  testimony  of  Mr.  Bird,  Traffic 
Manager  of  the  St.  Paul  road.  This  is  best  measured,  of  course,  by- 
revenue  per  ton  mile,  chap.  XII,  infra. 


RATE    MAKING    PRACTICE  181 

more  to  transport,  they  may  very  properly  be  advanced  in 
grade.  Normally,  raw  products  move  at  lower  rates  than  fin- 
ished products  —  for  instance,  wheat  and  flour  or  cattle  and 
beef.  This  is  in  accord  with  charging  what  the  traffic  will 
bear  in  relation  to  value.  But  in  the  making  of  export  rates, 
it  may  be  to  the  interest  of  the  carrier  to  reverse  this  order, 
actually  according  to  the  finished  product  the  lower  rate, 
thereby  encouraging  the  development  of  manufactures  at  home 
rather  than  abroad.^  Classification  committees  and  regulative 
commissions  are  thus  compelled  to  waver  between  the  two 
opposing  considerations  of  cost  and  value.  One  cannot  avoid 
the  conclusion,  however,  that,  contrary  to  the  usual  rule,  in 
this  field  of  classification  undue  weight  is  often  accorded  by 
railway  managers  to  that  small  element  of  total  cost  of  service 
arising  from  risks  of  damage  in  transit  —  insurance  cost,  in 
other  words  —  to  the  neglect  of  the  financially  more  important 
consideration  of  what  the  traffic  will  bear.  This  emphasis 
upon  the  cost  side  of  the  account  by  classification  committees, 
oddly  enough  is  peculiarly  characteristic  of  ratings  in  the  higher 
class  commodities.  Among  low  grade  goods,  like  grain,  lumber 
or  coal,  the  risk  of  damage  is  small,  so  that  insurance  cost 
becomes  almost  negligible.  The  insistent  consideration  among 
these  low  grade  commodities  is  much  more  apt  to  be  that  of 
relative  demand;  arising  from  the  necessity  of  close  and  constant 
adjustment  to  the  behests  of  trade.  Special  or  commodity  rates, 
based  directly  upon  what  the  traffic  will  bear,  rather  than  upon 
the  element  of  cost,  are  likely  to  prevail  in  these  cases.  But 
the  very  large  revenue  which  could  be  obtained  from  increas- 
ing the  rates  upon  the  higher  grade  of  goods  seems  not  to  be 
fully  appreciated. 

A  valuable  instance  of  the  play  of  opposing  considerations 

of  cost  and  value  of  service  in  the  classification  of  freight  rates 

is  afforded  by  the  complaint  in  1908  of  the  pulp  paper  makers 

in  Wisconsin,  already  cited  in  another  connection.^   It  appeared 

1  Flour  V.  wheat,  p.  135,  supra.  *  P.  148,  supra. 


182  RAILROADS 

that  for  similar  service  over  the  same  roads,  the  rates  per 
carload  on  saw  logs  for  lumber  were  only  about  one-half  those 
charged  for  carriage  of  logs  to  be  ground  into  paper  pulp. 
Judged  on  the  basis  of  commercial  value,  hemlock  and  spruce 
bolts,  too  short  and  often  otherwise  unfit  for  lumber,  were 
worth  much  less  than  saw  logs;  and  yet  they  paid  double  the 
freight  rates.  This  was  not  because  the  pulp  wood  was  less 
desirable  as  traffic.  In  many  ways  it  was  more  so.  The 
haul  was  twice  as  long  as  for  saw  logs.  The  paper  mills  brought 
relatively  more  supplementary  tonnage  in  the  form  of  coal, 
food  stuffs  and  supplies  for  workmen  and  their  iamilies.  Fully 
as  much  of  the  finished  product  to  be  reshipped  to  consumers 
resulted.  While  smaller  in  volume,  the  pulp  wood  business 
was  far  more  permanent.  It  was  growing  rapidly  while  the 
lumber  business  was  declining.  Moreover,  the  actual  cost  of 
service  in  hauhng  pulp  wood  was  fully  as  low  as  for  lumber 
logs.  Carloads  were  much  heavier,  and  were  more  regular  in 
movement.  In  practice  they  involved  no  milling-in-transit 
obligation,  that  is  to  say,  no  obligation  to  re-ship  the  finished 
paper  out  over  the  same  road;  while  all  the  saw  log  rates  carried 
this  obligation  —  a  matter  of  some  moment  to  the  railways. 
And  finally  the  value  of  the  service  to  shippers  of  pulp  wood 
was  less  than  to  mere  lumbermen;  in  other  words,  the  paper 
makers  were  operating  under  closer  margins  of  profit;  their 
plants  were  more  costly,  and  depreciated  more  rapidly.  The 
defence  of  the  carriers  in  this  case  was  not  that  the  rates  on 
pulp  wood  were  too  high  in  themselves,  but  that  the  rate  on 
saw  logs  was  perhaps  unduly  low  —  the  latter  having  been 
crowded  down  to  a  minimum  figure  by  competition  in  the 
early  days  of  the  business  by  the  lumber  raftsmen  who  floated 
the  saw  logs  downstream  from  the  forest  to  the  saw  mills. 
But  of  equal  importance  probably  in  perpetuating  the  higher 
rates  on  pulp  logs,  was  the  assumption  that  while  the  value  of 
the  bolts  themselves  was  perhaps  even  less  than  that  of  saw 
logs,  the  value  of  the  resultant  product,  paper,  was  much 


RATE  MAKING  PRACTICE  183 

greater  than  that  of  lumber.  But  the  Wisconsin  Railroad 
Commission,  in  entire  harmony  with  the  principle  repeatedly 
laid  do"\vn  by  the  Federal  commission,  held  that  the  carriers 
must  be  guided  by  real  distinctions  of  cost  from  a  transporta- 
tion standpoint  and  not  by  gradations  of  value.  If  the  goods 
were  bulky,  awkward,  or  risky  to  handle,  perhaps  requiring 
special  appliances  or  equipment,  relatively  high  classification 
was  permissible.  But  if  they  were  substantially  similar  for 
purposes  of  carriage,  no  gradation  in  rates  based  upon  differ- 
ences in  the  ultimate  uses  to  which  the  commodity  might  be 
put  would  be  upheld.  Such  was  the  reasoning  of  the  Inter- 
state Commerce  Commission  in  a  decision,  holding  that  fire, 
building  and  paving  brick  must  be  accorded  equal  rates,  re- 
gardless of  their  differing  values.^  That  the  element  of  value 
is,  however,  not  negligible  is  brought  out  in  a  later  Federal 
case,^  wherein  it  was  recommended  that  cheap  china,  to  be 
given  away  as  premiums  in  the  tea  trade,  be  rated  nearer 
ordinary  crockery  or  earthenware,  even  though  shipped  in  the 
same  manner  as  high  grade  china  ware.  Under  the  official 
classification,  chinaware  is  rated  first  class  if  in  boxes,  and 
second  class  in  casks.  Earthenware  or  crockery  is  carried  at 
twenty  per  cent,  less  than  third  class,  in  small  packages  (l.  c.  l.). 
On  the  basis  of  mere  cost  of  service,  it  would  seem  as  if  boxes 
of  chinaware  should  have  a  lower  rating  than  casks.  Boxes 
stow  better  than  casks,  with  less  risk  of  breakage.  But  the 
commercial  practice  being  to  ship  the  finer  grades  of  china- 
ware  in  boxes,  such  shipments  are  graded  higher  because  the 
traffic  will  usually  bear  a  higher  rate.  Thus  considerations  of 
cost  of  service  yield  to  those  of  value.  The  Interstate  Com- 
merce Commission,  however,  noting  the  exceptional  circum- 
stances under  which  the  tea  company  distributed  its  cheap 
chinaware,   recommended  a   revision  of  the   classification  to 

1  More  in  detail  at  p.  318,  infra.   Also  Hammond,  Rate  Theories  of  the 
I.C.C.,  1911,  p.  32. 

2U.  P.  Tea  Co.;  I.C.C.  Rep.,  No.  1569,  1908. 


184  RAILROADS 

meet  the  needs  of  the  case;  in  other  words  ordering  a  greater 
emphasis  upon  the  elements  of  the  value  of  the  service,  even  at 
the  expense  of  relative  cost  of  operation. 

Our  final  conclusion,  then,  must  be  this:  That  both  principles 
are  of  equal  importance;  and  that  both  must  be  continually 
invoked  as  a  check  upon  each  other.  The  tendency  to  the 
elevation  of  cost  of  service  to  a  position  of  priority  —  rather 
characteristic  of  regulative  bodies  and  of  legislators  —  is  no  less 
erroneous  than  the  marked  disposition  of  railway  managers  to 
insist  upon  the  universal  applicability  of  the  principle  of  charg- 
ing what  the  traffic  will  bear.  Neither  will  stand  the  test  of 
reasonableness  alone.  Whether  the  one  or  the  other  should 
take  precedence  can  only  be  determined  by  a  careful  study 
of  the  circumstance  and  conditions  in  each  case;  and  in  prac- 
tice, the  instances  where  either  principle  becomes  of  binding 
effect  to  the  entire  exclusion  of  the  other,  are  extremely  rare. 


CHAPTER  VI 

PERSONAL   DISCRIMINATION 

Rebates  and  monopoly,  with  attendant  danger  to  carriers,  185.  —  Per- 
sonal discrimination  defined,  188.  —  Distinction  between  rebating  and 
general  rate  cutting,  188.  —  Early  forms  of  rebates,  189.  —  Underbill- 
ing,  underclassification,  etc.,  190.  —  Private  car  lines,  192.  —  More 
recent  forms  of  rebating  described,  195. — Terminal  and  tap-lines,  196. — 
Midnight  tariffs,  197.  —  Outside  transactions,  special  credit,  etc.,  198. 

—  Distribution  of  coal  cars,  199.  —  Standard  Oil  Company  practices, 
200.  —  Discriminatory  open  adjustments  from  competing  centres,  202. 

—  Frequency  of  rebating  since  1900,  204-6.  —  The  Elkins  Law  of  1903, 
205.  —  Discrimination  since  1906,  207.  —  The  grain  elevation  cases, 
211.  —  Industrial  railroads  once  more,  212. 

The  philosophy  of  rebating  has  perhaps  never  been  better 
described  than  in  the  following  quotation  from  the  Cullom 
Committee  investigation  of  1886: 

"Mr.  Wicker.  I  am  speaking  now  of  when  I  was  a  railroad  man. 
Here  is  quite  a  grain  point  in  Iowa,  where  there  are  five  or  six  elevators. 
As  a  railroad  man,  I  would  try  and  hold  all  those  dealers  on  a  'level 
keel,'  and  give  them  aU  the  same  tariff  rate.  But  suppose  there  was 
a  road  five  or  six  or  eight  miles  across  the  country,  and  those  dealers 
should  begin  to  drop  in  on  me  every  day  or  two  and  tell  me  that  that 
road  across  the  country  was  reaching  within  a  mile  or  two  of  our 
station  and  drawing  to  itself  all  the  grain.  You  might  say  that  it 
would  be  the  just  and  right  thing  to  do  to  give  all  the  five  or  six  dealers 
at  this  station  a  special  rate  to  meet  that  competition  through  the 
country.  But,  as  a  railroad  man,  I  can  accomplish  the  purpose  better 
by  picking  out  one  good,  smart,  live  man,  and,  giving  him  a  concession 
of  three  or  four  cents  a  hundred,  let  him  go  there  and  scoop  the  business. 
I  would  get  the  tonnage,  and  that  is  what  I  want.  But  if  I  give  it  to 
the  five  it  is  knowTi  in  a  very  short  time.  I  can  iUustrate  that  better 
by  a  story  told  by  Mr.  Vanderbilt  when  he  and  his  broker  had  a  deal 
in  stocks.  The  broker  came  in  and  said,  'Mr.  Vanderbilt,  I  would 
like  to  take  in  my  friend  John  Smith.'  Mr.  Vanderbilt  said,  'Let  us 
see  how  this  will  work.  Here  are  you  and  myself  in  this  deal  now. 
We  take  in  John  Smith;  that  makes  a  hundred  and  eleven.  I  guess 
I  won't  do  it.'     When  you  take  in  these  people  at  the  station  on  a 


186  RAILROADS 

private  rebate  you  might  as  well  make  it  public  and  lose  what  you 
intend  to  accomplish.  You  can  take  hold  of  one  man  and  build  him 
up  at  the  expense  of  tlie  others,  and  the  railroad  -Rail  get  the  tonnage." 

"Senator  Harris.  The  effect  is  to  build  that  one  man  up  and 
destroy  the  others?  " 

"Mr.  Wicker.  Yes,  sir;  but  it  accomplishes  the  purposes  of  the 
road  better  than  to  build  up  the  six." 

The  force  of  this  description  of  the  underlying  motive  for 
personal  discrimination,  so  far  as  the  carrier  is  concerned; 
namely  to  build  up  one  man  at  the  expense  of  his  competitors 
and  to  attach  him  in  interest  indissolubly  to  the  company,  is 
well  exemplified  in  a  case  which  occurred  in  1908  at  Galveston, 
Texas.^  Practically  all  railway  traffic  entering  Galveston  was 
destined  for  export.  Wharfage  facilities  were  limited  to  two 
concerns,  one  of  them  being  the  Southern  Pacific  Terminal 
Co.  A  uniform  charge  of  one  cent  per  hundredweight  for 
cotton  seed  meal  and  cake  passing  over  the  wharves  of  both 
companies  had  been  the  rule  for  a  long  time.  Yet  it  appeared 
on  complaint  that  one  merchant  had  been  granted  wharfage 
space  under  discriminatingly  favorable  conditions.  Exemption 
from  demurrage  charges,  free  storage  room  and  other  favors 
and  a  fixed  rental  of  SI 5,000  per  year  irrespective  of  the 
amount  of  his  shipments,  had  enabled  him,  having  been  in 
business  only  since  1898,  to  build  up  a  very  large  traffic.  The 
export  of  cotton  seed  cake  instead  of  meal  had  greatly  in- 
creased since  1904.  The  business  of  all  other  competitors  since 
this  contract  was  made  had  shrunk  to  insignificant  proportions 
by  comparison  with  that  done  by  this  favored  merchant.  The 
margin  of  profit  in  the  business  was  so  small  that  the  difference 
between  the  charges  and  privileges  enjoyed  by  this  individual 
and  his  competitors,  was  forcing  them  all  out  of  business.  It 
was  estimated  by  the  Interstate  Commerce  Commission  that  if 
the  customary  wharfage  charges  had  been  paid,  the  rental 
would  have  been  nearly  $30,000  for  the  year  1907,  irrespective 

1  14  I.C.C.  Rep.,  250.  Upheld  by  the  Supreme  Court  in  1911;  219 
U.  S.,  498.     Also  23  Idem,  535.  _ 


PERSONAL  DISCRIMINATION  187 

of  other  favors.  The  cotton  planters  complained  also  that  this 
monopoly  limited  their  market  and  depressed  business.  It  is 
clear  that  the  larger  the  business,  that  is  to  say  the  more  nearly 
it  became  a  monopoly,  the  smaller  became  the  wharfage  charges 
per  hundredweight  under  this  system  of  a  fixed  rental;  and,  in 
consequence,  the  greater  was  the  disability  of  the  other  ship- 
pers. The  advantage  to  the  railroad  appeared  in  a  contract 
entered  into,  which  provided  that  all  traffic  for  this  individual 
should  be  routed  over  the  Southern  Pacific  or  its  connecting 
lines.  As  he  had  practically  gathered  in  all  the  cotton  seed 
export  business  of  Texas  and  the  adjoining  states  within  two 
years,  it  is  evident  that  this  consideration  was  of  great  value 
to  the  railroad.  The  economic  motive  in  this  case  and  in 
the  one  previously  cited  was  the  same.  It  will  be  found 
in  fact  to  underlie  almost  all  cases  of  personal  favoritism  and 
discrimination. 

The  supreme  disadvantage  in  building  up  a  great  monopoly 
in  order  to  win  traffic  for  a  railroad  is,  of  course,  that  the  mo- 
ment the  shipper  becomes  sufficiently  powerful,  he  can  play 
off  one  road  against  another,  thus  becoming  practically  master 
of  the  situation.  Sindbad  is  soon  overwhelmed  by  the  old 
man  of  the  sea.  And  the  weaker  the  road  financially,  the  more 
powerful  is  the  appeal,  to  which  at  last  even  the  strongest  lines 
must  succumb.  The  history  of  the  Standard  Oil  Company  dur- 
ing the  eighties  clearly  exemplifies  this.  The  rapid  rise  of  the 
cattle  "eveners"  yet  earlier,  until,  as  the  private  refrigerator 
car  companies  they  controlled  the  situation,  was  primarily 
traceable  to  the  same  causes.  The  late  J.  W.  Midgly^  gives 
a  forcible  illustration  in  the  attempt  in  1894  of  ninety-five 
railroads  to  reduce  the  mileage  allowance  paid  for  use  of  oil 
tank  cars  owned  by  private  companies  from  three-fourths  to 
one-half  cent  per  mile,  loaded  and  empty.  The  Union  Tank 
Line  promptly  replied  that  it  would  in  that  event  at  once  con- 

1  Circular  Letters  of  the  Chicago  Bureau  of  Car  Performances:  un- 
dated. 


188  RAILROADS 

centrate  all  its  vast  tonnage  to  points  north  and  west  of  Chicago, 
upon  the  single  line  —  presumably  the  weakest  one  —  which 
would  continue  the  old  rate.  This  argument  was  irresistible; 
and  in  the  old  days  of  unregulated  competition  was  in  the 
nature  of  things  bound  to  be  so. 

Careful  distinction  must  be  made  at  this  point,  between 
personal  discrimination  and  general  rate  cutting.  Rebating,  — 
that  is  to  say,  departure  from  published  tariffs, — occurs  in  both 
cases.  The  difference  between  the  two  is  that  in  the  one  case 
it  is  special,  particular  and  secret;  while  in  the  other  it  is  so 
general,  if  not  indeed  universal,  as  to  be  matter  of  common 
knowledge.  Rebating,  in  other  words,  is  a  common  feature  of 
rate  wars.  But,  on  the  other  hand,  general  harmony  in  the 
rate  situation  by  no  means  implies  the  absence  of  personal 
favoritism.  During  a  \vide-open  rate  war,  indeed,  the  most 
iniquitous  aspect  of  rebating,  —  inequality  of  treatment  as 
between  rival  shippers,  —  may  be  quite  absent.  All  may  be 
getting  the  same  rate,  namely  a  cut  rate ;  although  the  chances 
are  of  course  that  the  bigger  the  shipper,  the  more  substantial 
the  concessions  offered.  It  is  important  to  keep  this  distinction 
clear,  especially  since  the  railways  have  awakened  to  the  losses 
to  themselves  attendant  upon  rate  wars. 

All  parties  concerned  are  probably  agreed  in  the  hope  of 
eliminating  the  rate  war  forever.  But  there  is  not  the  same 
evidence  of  either  an  intent  or  desire  on  the  part  of  railway 
officials  to  get  rid  of  what,  from  a  public  point  of  view,  is  even 
more  insidious  and  unjust;  that  is  to  say,  the  secret  concession 
of  favors  to  a  few  chosen  large  shippers.  General  rate  wars, 
as  will  later  appear,  are  probably  a  thing  of  the  past.^  But 
secret  rebating  seems,  on  the  other  hand,  to  be  an  evil  which 
must  be  combatted  vigorously  and  unintermittently  in  order 
to  uproot  it  as  a  feature  of  American  industrial  life.  And  of 
course  it  must  cease.  For  it  is  the  most  prolific  source  of  evil 
known  in  transportation.  It  has  probably  had  more  to  do 
1  The  latter  half  of  chap.  XII. 


PERSONAL  DISCRIMINATION  189 

with  the  creation  of  great  industrial  monopoUes  than  any  other 
single  factor.  The  first  feature  of  any  reform  of  our  intolerable 
"trust"  situation,  must  be  to  keep  the  rails  open  on  absolutely 
even  terms  to  all  shippers,  large  or  small. 

The  keynote  of  discrimination  is,  as  we  have  said,  the 
creation  of  monopoly,  or,  at  all  events,  of  so  large  an 
aggregation  of  shipments,  that  a  profitable  partnership  be- 
tween the  shipper  and  the  railroad  results.  This  is  clear 
in  recent  indictments  which  charge  that  the  railroads  con- 
cerned, having  selected  one  large  firm  of  forwarders  in  New 
York  and  Chicago  are  giving  them  a  monopoly  in  respect 
of  all  imports.  In  the  case  of  the  great  beef  packers,  the 
railroad  having  once  built  up  a  shipper  by  favored  rates, 
may  continue  in  the  enjoyment  of  this  concentrated  ton- 
nage with  greater  security  and  profit  than  if  it  moved  in 
a  multitude  of  small  shipments  by  numerous  competitors.  Of 
course  there  is  another  less  common  form  of  rebating  which, 
so  far  as  its  profit  is  concerned,  is  limited  to  the  particular 
dishonest  railway  official  who  arranges  the  matter.  Such 
favoritism  as  this,  however,  represents  a  loss  to  the  company; 
and  has  always  been  stamped  out  by  the  carriers  when  dis- 
covered. The  principal  form  above  described,  is  much  more 
difficult  to  uproot.  And  yet  for  some  reason,  it  is  a  distinctively 
American  abuse.  European  countries  seem  never  to  have 
suffered  from  it,  to  any  such  degree  as  has  the  United  States. 
It  is,  as  has  just  been  said,  perhaps  the  most  iniquitous,  the  most 
persistent  and  until  very  recently  the  most  nearly  ineradica- 
ble evil  connected  with  the  great  business  of  transportation. 

Rebating  in  the  early  days  consisted  in  simply  refunding 
by  direct  payment  to  the  favored  shipper,  a  certain  proportion 
of  the  freight  bill.  This  refund  might  be  in  cash,  in  presents  to 
himself  or  his  family,  in  salary  allowances  to  clerks,  in  free 
passes,  or  in  free  transportation  of  other  goods.  In  a  re- 
cent case  in  New  York  it  has  taken  the  form  of  importer's 
"commissions."     But,  since  1887  at  least,  an  inconvenience  in 


190  RAILROADS 

all  such  transactions  is  their  necessary  entry  in  some  form  or 
other  upon  the  books  of  the  company.  Of  course  such  rebates 
could  be  covered  up  as  a  fictitious  charge  to  operating  expenses; 
or,  as  in  the  case  of  the  Atchison  in  1893,  might  be  carried  as 
an  asset,  as  if  such  refunds  would  ever  be  paid.     Nearly  $4,000,- 

000  was  thus  entered  as  padding  in  Atchison  assets,  when  it 
went  into  a  receiver's  hands  at  that  time.^  Much  of  the  fla- 
grant Standard  Oil  rebating  in  the  eighties  was  almost  openly, 
and  certainly  boldly,  carried  on  by  these  means.  But  public 
sentiment  was  always  against  it;  and  of  course,  it  was  a  breach 
of  good  faith  as  between  the  railways  themselves,  in  their 
endeavor  to  maintain  agreed  rates.  Secrecy,  therefore,  always 
attaches  to  these  transactions;  and  the  most  ingenious  devices 
were  invented  to  confer  favors  without  detection. 

Underclassification  of  freight  was  a  very  common  device 
in  the  old  days.  It  has  reappeared  again  since  1907  in  much 
the  same  form.  There  is  a  great  difference  between  the  freight 
on  a  keg  of  nails  and  of  fine  brass  hardware  or  cutlery.  Who 
is  to  know  whether  a  shipment  be  billed  as  one  or  the  other? 
Is  every  box  of  dry  goods  to  be  examined  in  order  to  discover 
whether  it  contains  silks  or  the  cheapest  cotton  cloth?  A  car- 
load of  lumber  or  cordwood  might  easily  by  prearrangement 
be  filled  inside  with  high  grade  package  freight.  The  utmost 
vigilance  is  in  fact  necessary  on  the  part  of  carriers,  to  prevent 
such  fraudulent  practices  by  shippers.  Under  the  Joint  Rate 
Trunlc  Line  Inspection  Bureau  in  1893,  183,575  such  false 
descriptions  or  underweighings  were  detected  on  westbound 
shipments  from  seaboard  cities  alone.-  What  the  amount 
of  such  underclassification  of  freight  by  collusion  between 
agent  and  shipper  was,  can  only  be  conjectured.  Even  more 
difficult  to  detect  was  the  practice  of  underbiUing.^    At  a  certain 

1  The  chapter  on  reorganizations  in  vol.  II  will  afford  other  instances 
with  full  references.     Com.  &  Fin.  Chron.,  LIX,  p.  232. 

2  5.5th  Cong.,  1st  Sess.,  Sen.  doc,  39,  p.  29. 

3  Ann.  Rep.,   I.C.C.,   1896,  p.  82:    and   1897,  p.  53.     Fine  cases  in 

1  I.C.C.  Rep.,  633-656. 


PERSONAL  DISCRIMINATION  191 

time,  the  rate  on  flour  from  Mimieapolis  to  New  York  was 
thirty  cents  per  hundredweight,  divided  between  connecting 
roads  in  the  proportion  of  ten  cents  from  Minneapolis  to 
Chicago,  and  twenty  cents  from  there  on  to  destination.  In 
the  meantime,  as  against  this  ten  cent  proportion  of  the  through 
rate  to  New  York,  the  local  rate  from  Minneapolis  to  Chicago 
was  twelve  and  one-half  cents.  As  between  two  rival  shippers, 
the  one  sending  to  Chicago  on  a  New  York  through  rate 
instead  of  a  local  one,  would  enjoy  a  clear  advantage  of  twenty- 
five  per  cent,  over  his  competitor.  And  who  was  to  know 
whether  a  car  billed  through  to  New  York,  was  really  going 
beyond  Chicago  or  not?  In  one  period  of  three  months, 
1098  cars  thus  through  billed  to  New  York  were  turned  over 
at  Chicago  to  a  belt  line  road;  and  only  468  actually  went  on 
to  that  destination.  About  sixty  per  cent,  of  the  traffic  was 
being  rebated  by  this  means.  Very  complicated  arrangements 
of  this  sort  were  rife  in  the  Alissouri  river  rate  wars  on  grain  in 
1896.  This  was  known  as  the  "expense-bill"  system;  or 
"carrying  at  the  balance  of  the  through  rate."  ^ 

Many  services  or  facilities  are  worth  as  much  to  a  merchant 
as  a  direct  refund  in  cash.  He  may  be  given  free  cartage. 
This  was  a  very  common  expedient  in  the  early  days;  being 
fully  considered  by  the  Interstate  Commerce  Commission.^ 
Or  free  storage  on  wheels  or  in  freight  houses  may  be  utilized 
as  a  cover  for  favoritism.  A  low  carload  rate  might  be  given, 
and  then  the  goods  be  held,  storage  free,  by  the  railway  at 
some  central  point;  to  be  subsequently  delivered  piecemeal 
as  sold.  The  dealer  would  be  relieved  of  all  expense  for  ware- 
housing as  well  as  of  high  less-than-carload  rates  from  the 
initial  point  of  shipment.  The  competitor  who  paid  the  less- 
than-carload  rate  on  an  equal  volume  of  business  would  be 
sadly  handicapped.     Cases  are  on  record  where  fish  was  thus 

^  Investigation  of  grain  rates  at  Missouri  river  points;   54th  Cong., 
2iid  Sess.,  Sen.  doc.  115,  pp.  17-22,  etc. 
2  167  U.  S.  Rep.,  633. 


192  RAILROADS 

stored  free  from  November  to  February,  being  reshipped  on 
order  in  small  lots.  Or  an  excessive  allowance  might  be  made 
by  the  railway  for  some  service  or  facility  afforded  by  the  ship- 
per. The  beef  interests  first  got  their  hold  upon  the  carriers 
by  demanding  liberal  rebates  in  return  for  acting  as  "eveners" 
in  the  partition  of  traffic  between  the  trunk  lines  about  1873. 
Complaint  against  excessive  allowances  to  favored  grain  eleva- 
tor owners,  was  common  all  through  the  West  for  years.  The 
elevator  allowance  cases  before  the  Interstate  Commerce 
Commission  in  1906-1910  concerning  practices  on  the  Union 
Pacific  lines  illustrate  the  delicacy  of  the  issues  involved.^ 

Deductions  from  the  full  tariff  for  the  use  of  special  equip- 
ment owned  by  shippers,  has  been  one  of  the  commonest 
means  of  building  up  great  monopolies.-  The  allowances  to 
the  Standard  Oil  Company  for  the  use  of  its  tank  cars,  before 
the  construction  of  pipe  lines,  and  especially  prior  to  1888,  were 
a  source  of  great  unrest.^  But  the  construction  of  pipe  lines 
has  not  lessened  their  importance.  It  is  on  record  that  the  use 
of  private  cars  in  other  lines  of  business  has  led  to  grave  abuses. 
When  stock  cars  and  beef  refrigerator  cars,  owned  by  private 
shippers,  first  began  to  be  used  about  1883-1884,  they  were 
much  sought  after  by  the  railroads  as  traffic.  They  moved 
regularly,  not  by  seasons;  the  volume  of  business  was  large 
and  rapidly  growing;  it  was  concentrated  at  a  few  large  initial 
points;  much  of  it  was  high  class  and  very  remunerative. 
With  the  enormous  extension  of  refrigeration  to  cover  the  long- 
distance movement  of  fruit  and  vegetables,  a  still  more  power- 
ful encouragement  came  into  play.  These  latter  businesses 
were  highly  seasonal.     Few  roads  could  afford  to  maintain 

iP.  211,  infra. 

2  On  private  car  lines,  Columbia  University  Studies,  etc.,  LXXXI, 
1908,  p.  185.  J.  W.  Midgley's  Circular  Letters  as  chief  of  the  Bureau  of 
Car  Performances  in  1901,  costing  him  his  position,  by  the  way,  are  most 
significant.  Car  service  reform  resulted  nevertheless.  Cf.  Quarterly 
Journal  of  Economics,  1904,  p.  299.     See  pp.  96  and  140,  supra. 

'  U.  S.  Bureau  of  Corp.,  Rep.  on  Trans,  of  Petroleum,  pp.  36,  60, 
81,  88. 


PERSONAL  DISCRIMINATION  193 

highly  specialized  equipment  to  care  for  a  business  of  a  few 
weeks  length.  But  a  private  company  operating  all  over  the 
country,  could  utilize  its  cars  first  for  early  vegetables  and 
fruits  from  the  south,  then  from  the  middle  west  or  the  Oregon- 
Washington  region,  and  finally  in  winter  for  oranges  from  Cali- 
fornia or  Florida.  The  number  of  these  cars  rapidly  increased 
until  by  1903  there  were  130,000  in  service,  —  in  fact  about 
one-eleventh  of  all  the  freight  cars  in  the  United  States  were 
privately  owned.  The  so-called  Armour  interests,  primarily 
engaged  in  the  packing  business,  were  by  far  the  largest  single 
concern. 

The  system  of  payment  for  the  use  of  these  cars  consisted 
of  an  allowance,  based  upon  the  mileage  performed.  This 
used  to  be  one  cent  per  mile,  loaded  and  empty,  for  refrigerator 
cars.  In  1894  a  determined  effort  was  made  by  the  carriers  to 
reduce  this  below  the  point  then  reached  of  three-fourths  of  a 
cent  per  mile.  But  the  extraordinary  concentration  both  of 
ownership  and  traffic,  rendered  it  easy  for  the  car  companes  to 
defeat  the  proposition.  In  the  meantime  the  steady  increase 
in  volume  of  traffic,  making  whole  trainloads  possible,  together 
with  the  growth  of  very  long  distance  business,  made  it  im- 
perative that  these  trains  be  operated  at  high  speed  with  few 
stops.  This  at  once  enormously  enhanced  the  earning  power 
of  each  car,  as  based  upon  mileage.  The  performance  was 
often  as  high  as  four  times  that  of  the  ordinary  freight 
cars. 

Under  these  new  conditions,  at  the  current  rate  of  earnings, 
a  car  would  pay  for  itself  in  three  years,  besides  paying  all  ex- 
penses of  maintenance.  The  bm-den  of  these  allowances  be- 
came very  great.  The  situation  some  years  ago  is  well  described 
by  a  former  member  of  the  Interstate  Commerce  Commission, 
as  follows :  — 

"Investigations  made  by  the  Interstate  Commerce  Commission 
at  different  times  have  disclosed  to  some  extent  the  very  large  sums 
received  by  shippers  as  mileage  for  the  use  of  such  cars. 

VOL.  I — 13 


194  RAILROADS 

"By  an  investigation  made  in  1889  it  appeared  that  on  a  single 
line  of  road  between  Chicago  and  an  interior  Eastern  point  —  a  dis- 
tance of  470  miles  —  refrigerator  cars  owned  by  three  sliipping  firms 
made  in  nine  months,  from  August  1,  1888,  to  May  1889,  7,428,406 
miles,  and  earned  for  mileage  $72,945.97,  being  about  $8,112  a  month 
or  substantially  at  the  rate  of  $100,000  a  year. 

"By  another  investigation,  made  in  1890,  it  appeared  that  private 
stock  cars  to  the  number  of  250  had  been  used  upon  a  line  made  up  of 
two  connecting  roads  between  Chicago  and  New  York,  beginning  with 
150  cars  on  September  1,  1880,  increased  30  more  a  month  later,  20 
more  another  month  later,  and  reaching  the  total  of  250  in  June,  1890; 
that  the  cars  altogether  had  cost  $156,500,  and  had  earned  for  mileage 
in  two  years,  from  September  1, 1888,  to  September  1, 1890,  $205,582.68; 
that  the  entire  expense  to  be  deducted  during  that  period  for  car 
repairs  and  salaries  for  their  management  was  $34,050.48,  leaving  net 
revenue  to  the  amount  of  $171,532.20,  being  an  excess  of  $15,032  above 
the  whole  cost  of  the  cars.  The  cars  were,  therefore,  paid  for  and  a 
margin  besides  in  two  years,  and,  thereafter,  under  the  same  manage- 
ment and  with  a  corresponding  use  of  the  cars,  an  income  of  upward 
of  $100,000  a  year  was  assured  on  an  investment  fully  repaid,  or,  in 
effect,  on  no  investment  whatever." 

By  1903  the  railroads  were  paying  over  $12,000,000  annually 
for  the  use  of  such  equipment. 

With  the  growth  of  their  power,  the  extortionate  demands 
of  these  private  car  lines,  both  upon  the  railroads  and  the 
shipper,  steadily  enlarged.  From  the  roads  they  often  com- 
pelled fictitious  mileage  allowances;  and  from  the  shipper  the 
most  outrageous  charges  were  made  for  icing  and  other  services 
en  route.  The  reports  of  the  Interstate  Commerce  Commission 
for  1903-1904  and  of  the  Senate  (Elkins)  Committee  of  1905 
deal  fully  with  these  abuses.  Moreover  the  Armour  company 
gradually  forced  other  competitors  out  of  business,  and  with 
the  growth  of  monopoly,  its  exactions  became  even  more 
extreme.     The  following  instance  is  typical. 

"In  1898  the  Armour  Car  Lines  Company  was  furnishing  cars  for 
the  movement  of  Michigan  fruits  from  points  on  the  Fere  Marquette 
Railroad  to  Boston  in  competition  with  other  private  car  companies, 
and  its  charge  for  refrigeration  to  Boston  was  $20  per  car.  Its  present 
charge  to  Boston  is  $55  per  car.  Before  the  present  exclusive  contract 
was  entered  into  between  the  Armour  Car  Lines  and  the  Pere  Marquette 


PERSONAL  DISCRIMINATION  195 

Railroad  Company  the  actual  quantity  of  ice  required  was  charged  for 
at  S2.50  per  ton.  Under  this  system  the  cost  of  refrigerating  cars  from 
Pa^vpaw,  Mich.,  to  Dubuque,  Iowa,  averaged  about  SIO  per  car,  while 
the  present  schedule  of  the  Armour  Car  Lines  is  S37.50.  The  cost  of 
icing  from  Mattawan,  Mich.,  to  Duluth  was  S7.50,  as  showTi  by  an 
actual  transaction  in  the  year  1902,  while  the  present  refrigeration 
charge  between  those  points  is  S45.  The  cost  of  icing  pineapples  from 
Mobile  to  Cincinnati  under  an  exclusive  contract  with  the  Armour  Car 
Lines  is  S45,  wliile  the  cost  of  performing  the  same  service  from  New 
Orleans  to  Cincinnati  over  the  Illinois  Central  is  S12.50  per  car." 

Fortunately  the  progressive  enlargement  of  Federal  powers  of 
supervision  has  tended  to  check  these  exactions.  But  the 
system  of  special  allov^^ances  for  the  use  of  privately  owned 
equipment,  is  one  which  needs  the  most  careful  watching  by 
the  authorities. 

With  the  passage  of  time,  and  especially  since  1896,  new 
and  even  more  elaborate  schemes  for  rebating  have  come  to 
light.  One  of  the  most  ingenious,  which  was  discovered  about 
1904  to  be  very  widespread,  was  the  use  of  terminal  or  spur 
track  railway  companies.^  In  Hutchinson,  Kansas,  for  exam- 
ple, were  salt  works  having  a  capacity  of  some  6000  barrels  a 
day.  Two  railways  were  available  for  shipments.  A  new 
company  was  incorporated,  all  its  stock  being  held  by  the  salt 
works  owners,  which  constructed  sidings  to  both  railroad  lines. 
The  spur  track  was  less  than  a  mile  long  and  cost  only  about 
$8000  to  build.  But  the  company  was  chartered  as  the  Hutchin- 
son and  Arkansas  River  Railroad.  Its  officers  were  the  owners 
of  the  salt  mills.  It  owned  neither  engines  nor  cars.  Yet  it 
entered  into  a  traffic  agreement  wath  the  Atchison  road  for  a 
division  of  the  through  rate  to  many  important  points,  its 
share  being  about  twenty-five  per  cent.  So  substantial  a  pro- 
rate was  this,  that  in  a  few  months  the  H.  and  A.  R.  R.  received 
back  some  fifteen  thousand  dollars  as  its  share  of  the  through 

1  10  I.C.C.  Rep.,  1,  148,  385  and  661:  18th  Ann.  Rep.,  I.C.C,  19  and 
42:  Senate  (Elkins)  Committee,  1905,  pp.  2424-2495.  Later  cases  dis- 
cussed at  p.  212,  injra. 


196  RAILROADS 

freight  rates.  And  every  dividend  declared  by  it  was,  of 
course  in  effect  a  rebate  enjoyed  exclusively  by  this  particular 
mill,  as  against  less  favored  competitors. 

Obviously,  rebates  assuming  the  above-described  form  are 
open  only  to  very  large  shippers,  to  whom  it  is  worth  while  to 
incur  the  considerable  expense.  But  many  concerns  have 
already  such  trackage  in  or  about  their  works.  Nothing  is 
needed  except  to  incorporate  them  separately,  and  then  to  enter 
into  suitable  traffic  agreements  with  standard  roads.  Many  of 
the  so-called  trusts  were  implicated  in  such  transactions,  about 
1904-1905.  The  International  Harvester  Company  at  Chicago 
had  for  years  performed  much  of  its  own  terminal  service ;  and 
until  1904  was  allowed  as  high  as  $3.50  per  car  for  switching 
charges  by  connecting  railroads.  It  then  incorporated  the 
Illinois  Northern  Railroad,  which  was  promptly  conceded 
twenty  per  cent,  of  all  through  rates,  with  the  Missouri  river 
rate  as  a  maximum.  On  this  traffic  it  would  be  allowed  as 
high  as  $12  per  car,  instead  of  $3.50  as  before.  The  Illinois 
Steel  Company  afforded  in  1905  an  even  more  flagrant  example. 
Apparently  it  had  enjoyed  extra-liberal  proportions  of  through 
rates  since  1897,  by  means  of  its  separately  incorporated  and, 
in  fact,  really  important  terminal  road.  But  an  allowance  of 
$700  to  $1000  for  hauling  a  trainload  of  coke  some  seven  miles, 
yielded  a  profit  on  the  business  of  perhaps  ninety  per  cent. 
It  was  an  advantage  which  no  competitor  could  hope  to  equal. 
No  doubt  the  practice  of  switching  allowances  was  properly 
used  at  the  start.  But  the  large  crop  of  cases  discovered  in 
1904-1905  proved  that  they  had  come  to  be  very  widely  used 
as  a  cover  for  rebating.  It  is  not  always  easy,  however,  to 
decide  when  such  an  allowance  ought  to  be  made  to  a  privately 
owned  terminal  company.  The  Anheuser-Busch  case,  decided 
in  June,  1911,  with  a  dissenting  opinion  by  Commissioner  Har- 
lan, shows  how  intricately  involved  such  issues  may  become.^ 

The  so-called  "midnight  tariff"  was  a  strictly  legal  way  of 
1  P.  212,  injra. 


PERSONAL  DISCRIMINATION  197 

conferring  favors  upon  certain  shippers.  It  was  much  in  evi- 
dence during  the  grain  wars  between  lines  serving  the  Gulf 
ports  about  1903.  And  it  seems  to  have  been  a  device  used  at 
times  all  over  the  country.  A  traffic  manager  wishing  to  steal 
all  the  business  of  a  large  shipper  from  some  competing  road, 
and  to  build  him  up  at  the  expense  of  his  rivals,  secretly  agrees 
to  put  into  effect  a  low  rate  on  a  given  date.  The  shipper  then 
enters  into  contracts  calling  for  perhaps  several  hundred  car- 
loads of  grain  to  be  delivered  at  that  time.  This  reduction  is 
publicly  filed,  perhaps  thirty  days  in  advance,  with  the  Inter- 
state Commerce  Commission  at  Washington.  But  who  is  to 
discover  it,  in  the  great  medley  of  new  tariffs  placed  on  file 
every  day?  Yet  this  is  not  all.  A  second  tariff,  restoring  the 
full  rate,  is  also  filed  to  take  effect  very  shortly,  — perhaps  only 
a  day,  —  after  the  reduction  occurs.  All  these  are  public,  and 
open  to  all  shippers  alike.  But  only  the  one  who  was  fore- 
warned is  able  to  take  advantage  of  them.  He  rushes  all  his 
shipments  forward  while  the  reduced  rates  are  in  effect.  Before 
other  competitors  can  assemble  their  grain  or  other  goods,  the 
brief  reduction  has  come  to  an  end;  and  rates  are  restored  to 
their  former  figure. 

The  President  of  the  Chicago  Great  Western  Railway  has 
concisely  described  the  commercial  effect  of  one  of  these  mid- 
night tariffs. 

"A  clean  profit,  he  says,  over  all  expenses  of  one  half  of  a  cent 
per  bushel  is  a  satisfactory  profit  to  the  middleman;  and  a  guaranteed 
rate  of  transportation  of  even  so  small  a  sum  as  one-quarter  of  a  cent 
per  bushel  less  than  any  other  middleman  can  get,  will  give  the  man 
possessing  it  a  monopoly  of  the  business  of  handling  the  corn  in  the 
district  covered  by  the  guaranty.  Why?  Such  are  the  facilities  of 
trade  by  means  of  bills  of  lading,  drafts,  telegraphs,  banks,  etc.,  that 
to  do  an  enormous  corn  trade,  the  middleman  requires  only  a  compara- 
tively small  capital  to  use  as  a  margin.  A  capital  of  $50,000  is  ample 
thus  to  handle  15,000,000  bushels,  and  with  activity,  double  that 
amount,  per  annum.  One  quarter  of  a  cent  per  bushel  profit  on  15,000- 
000  bushels  would  amount  to  $37,500  which  is  equal  to  .75  per  cent, 
per  annum  on  the  capital  employed." 


198  RAILROADS 

A  similar  device  was  used  by  the  Burlington  road  in  its  dealings 
with  the  Missouri  river  packing  houses  on  export  traffic.  They 
signed  an  agreement  making  a  rate  to  Germany  of  twenty-three 
cents  per  hundred  to  last  until  December  31,  1905.  Before  the 
expiration  of  this  time,  however,  the  roads  concerned,  publicly 
filed  an  amended  tariff  presumably  for  all  shippers  of  thirty-five 
cents  per  hundred.  They  nevertheless  continued  the  old  rate 
to  the  packers.  This  case  went  to  the  Supreme  Court  which  de- 
cided in  1908  that  the  device  was  unlawful  and  discriminatory.^ 

And  then  again  there  are  all  the  possibiUties  of  the  printer's 
art  to  be  used,  in  connection  with  the  preparation  of  elabo- 
rate tariffs. 2  The  tariff  of  "33  cents  per  hundredweight"  may 
conceivably  be  a  typographical  error,  to  be  speedily  corrected 
in  a  supplementary  hektograph  sheet  filed  the  next  day.  In- 
volved and  elaborate  rate  sheets  may  be  reprinted  with  only 
one  little  change  among  a  thousand  items  left  as  before.  Dif- 
ferent tariffs  may  interlock  with  complicated  cross  references. 
In  one  case  in  1902  it  took  seven  different  tariffs  to  enable  one 
to  compute  the  rate  for  a  given  shipment.  In  twelve  months, 
to  December  1907,  there  were  filed  with  the  Interstate  Com- 
merce Commission  220,982  such  tariffs,  each  containing  changes 
in  rates  or  rules.  Some  "expire  with  this  shipment,"  —  and 
some  agree  to  "protect"  any  rate  of  any  competing  carrier, 
that  is  to  say,  to  meet  it  if  it  happen  to  be  lower. 

An  entirely  different  plan  of  rebating,  —  and  a  most  effect- 
ive one,  —  has  to  do  with  apparently  unrelated  commercial 
transactions.^  Many  shippers  are  large  sellers  of  supplies  to 
the  railroad.  How  easy  then  to  make  a  concession  in  rates  to 
an  oil  refinery  for  example,  by  paying  a  little  extra  for  the  lubri- 
cating oil  bought  from  a  subsidiary  concern.  The  Federal 
authorities  in  recent  years  and  especially  in  connection  with 
the  prosecution  of  the  Standard  Oil  Company  in  1908-1911, 

1  P.  209,  infra. 

2  11th  Ann.  Rep.,  I.C.C;   16th  Idem,  p.  1.3;  and  21st  Idem,  p.  14. 
^  Bureau  of  Corp.,  Rep.  on  Trans,  of  Petroleum,  1905,  p.  105  et  seq. 


PERSONAL  DISCRIMINATION  199 

have  discovered  the  most  extraordinary  variations  in  the  prices 
paid  by  railroads  for  supplies.  Independent  concerns  were 
often  not  allowed  to  compete  in  the  sale  of  lubricants  at  all. 
It  would  be  difficult  to  prove  any  connection  between  so  widely 
separate  sets  of  dealings;  and  yet  it  is  clear  that  rebates  are 
often  given  in  this  way.  Or  even  more  fruitful  as  an  expedient, 
especially  in  these  later  days  when  rebating  is  a  serious  offence, 
why  not  confer  a  favor  by  extra  liberality  in  allowances  for 
damages  to  goods  in  transit?  In  1909  the  so-called  Beef  Trust 
was  specifically  ordered  by  the  Attorney  General  of  the  United 
States  to  desist  from  such  practices.  Positively  the  only  way 
to  detect  such  fictitious  allowances  for  damages,  is  to  ferret  out 
each  case  by  itself.  This  is  a  slow  and  necessarily  expensive 
process.  Damage  allowances  and  quid  -pro  quo  transactions 
in  the  purchase  of  supplies,  are  indeed  almost  "smokeless 
rebates,"  as  they  have  aptly  been  termed. 

Personal  discrimination  may  be  as  effective  upon  compe- 
tition through  denial  of  facilities  to  some  shippers,  as  through 
conferring  of  special  favors  upon  others.  Practices  of  this 
sort  have  been  quite  common  in  the  coal  business,  especially 
in  the  matter  of  furnishing  or  refusing  to  furnish  an  ample  sup- 
ply of  cars  or  suitable  spur  tracks  to  mines.  In  the  well  known 
Red  Rock  Fuel  Company  case  in  1905,^  the  railroad  definitely 
announced  its  policy,  "not  to  have  a  lot  of  little  shippers  on  its 
line  who  would  ship  coal  when  prices  were  high  and  then  shut 
up  shop  and  go  home  and  let  the  large  shippers  have  the  lean 
years."  The  development  of  over  4,000  acres  of  coal  lands 
was  thus  denied  in  favor  of  the  large  companies,  until  the 
Interstate  Commerce  Commission  took  the  matter  up.  A 
year  later  came  the  startling  revelations  upon  the  Pennsylvania 
Railroad  as  to  the  practice  of  discrimination  in  furnishing  cars 
to  coal  mines.^     A  comprehensive  investigation  by  the  com- 

1  11  I.C.C.  Rep.,  438;   CJ.  13  Idem,  70;  and  19  Idem,  356. 

2  Report  on  Discriminations  and  Monopolies  in  Coal  and  Oil;  Jan.  25, 
1907,  pp.  1-81. 


200  RAILROADS 

pany  itself  resulted  in  the  discharge  of  a  number  of  high  officials. 
It  appeared,  for  example,  that  the  assistant  to  President  Cassatt 
had  acquired  $307,000  in  stock  of  coal  companies  without  cost; 
that  a  trainmaster  for  $500  had  purchased  coal  mine  stock 
which  yielded  an  annual  income  of  $30,000;  and  that  one  road 
foreman  was  given  three  hundred  shares  of  the  same  company 
stock  for  nothing.  In  all  these  cases  the  object  was  to  secure 
not  only  an  ample  supply  of  cars  for  the  favored  companies, 
but  perhaps  even  the  denial  of  suitable  service  to  troublesome 
competitors.  In  this  regard,  the  old  practices  of  the  Standard 
Oil  Company  in  the  eighties  are  recalled.  Not  only,  as  in 
the  celebrated  Rice  case,^  did  it  demand  heavy  refunds  on  its 
own  shipments,  but  it  also  compelled  the  imposition  of  a  sur- 
tax on  its  competitors'  traffic  which  was  to  be  added  to  its  own 
special  allowance. 

Yet  other  means  of  favoring  large  shippers  at  the  expense 
of  small  ones,  are  almost  impossible  to  eradicate.  Certain  of 
these  may  be  illustrated  by  recently  discovered  practices  of 
the  Standard  Oil  Company.  They  are  fully  described  in  a 
special  report  of  the  United  States  Commissioner  of  Corpora- 
tions in  1905.  Upon  the  basis  of  this  evidence,  extraordinary 
efforts  were  made  by  the  Federal  authorities  to  secure  con- 
victions and  to  impose  heavy  fines  for  violation  of  the  Elkins 
law.  But  the  company  escaped  heavy  penalties,  in  the  main, 
by  reason  of  legal  technicalities.  The  prosecutions  of  1906- 
1909,  however,  cannot  be  regarded  as  valueless,  merely  because 
the  company  escaped  the  imposition  of  fines  aggregating  mil- 
lions of  dollars.  The  moral  effect  of  it  was  thoroughly  good; 
and  it  is  now  clear  that  laws  can  be  so  drawn  as  to  apply  in 
future.  Nor  can  any  student  of  the  evidence  doubt  for  a  mo- 
ment, that,  whether  strictly  an  infraction  of  the  law  or  not, 
the  n(^t  result  of  these  practices  was  to  confer  an  advantage 
upon  this  large  shipper,  not  open  to  its  smaller  competitors. 
Certain  of  its  advantages,  such  as  the  ownership  of  pipe  lines 
^  Ripley,  Railway  Problems,  chap.  II,  fully  described. 


PERSONAL  DISCRIMINATION  201 

from  the  wells  to  the  seaboard  refineries  and  the  strategic 
location  of  its  plants,  are  the  fruit  of  great  resources  and  keen 
business  acumen.  But  other  advantages,  particularly  the 
relative  rates  on  refined  oil  from  Standard  Oil  plants  and  from 
centres  of  independent  refining,  are,  according  to  the  report  of 
the  Bureau  of  Corporations,  due  to  pressure  brought  to  bear 
upon  the  carriers.  Whether  they  are  or  not,  the  result  is 
discriminatory  just  the  same. 

The  reason  for  the  persistent  pressure  for  low  rates  on 
petroleum  products  is,  of  course,  that  the  cost  of  manufacture 
is  so  low  relatively  to  the  expense  of  transportation.  An 
ample  manufacturing  profit  is  one-half  cent  per  gallon  of  crude 
oil;  and  the  average  cost  of  refining  does  not  exceed  that 
amount.  Yet  a  half  cent  will  scarcely  pay  freight  for  more 
than  one  hundred  miles.  Hence  it  follows  that  for  distances 
greater  than  this,  the  question  of  profit  or  loss  may  entirely 
depend  upon  the  delicate  adjustment  of  the  freight  rate.  In 
this  regard,  a  great  company  shipping  all  over  the  country 
has  a  great  advantage  over  smaller  competitors  with  a  strictly 
local  market,  in  that  it  can  play  off  one  rate  against  another. 
Thus,  in  one  notable  case,  cited  by  the  Bureau  of  Corporations, 
the  Burlington  road  gave  an  absolutely  unremunerative  rate 
from  the  Standard  refinery  at  Whiting  near  Chicago  to  East 
St.  Louis,  thereby  enabling  troublesome  competition  to  be 
subdued;  but  it  was  recompensed  by  the  payment  of  heavier 
charges  on  shipments  to  other  points  on  the  Burlington  system, 
where,  there  being  no  competition,  the  high  freight  rate  could 
be  shifted  on  to  the  consumer.  The  Conmiissioner  of  Corpora- 
tions gives  one  instance  on  the  Northwestern  road  of  a  car- 
load rate  from  Whiting  to  Milwaukee  in  order  to  meet  water 
competition  from  independents  at  Toledo,  which  netted  the 
carrier  just  ninety-two  cents  for  the  carriage  of  24,000  pounds 
of  oil  a  distance  of  eighty-five  miles,  with  free  return  of  the 
empty  car. 

The  peculiarity  of  many  of  these  rate  adjustments  of  the 


202  RAILROADS 

Standard  Oil  Company  of  late  years  was  that  they  were  publicly 
filed;  and  hence  not  open  to  legal  attack.  This  does  not  how- 
ever detract  in  the  least  from  their  discriminatory  character. 
One  example,  right  here  in  New  England,  now  happily  corrected, 
may  be  cited  from  the  records  of  the  Interstate  Commerce 
Commission  for  1906.^  The  southern  half  of  New  England 
was  mainly  supplied  with  kerosene  from  the  great  Standard 
rej&nery  at  Bayomie,  New  Jersey.  The  oil  was  brought  there 
from  the  fields  by  pipe  line;  and,  being  refined,  was  distributed 
by  tank  vessels  all  along  the  coast,  with  a  short  rail  haul  there- 
after to  inland  points.  The  total  cost  to  the  Standard  com- 
pany was  estimated  by  the  Bureau  of  Corporations  at  between 
fourteen  and  sixteen  cents  per  hundredweight.  To  meet  this, 
the  independent  western  refiners  had  to  ship  all  the  way  by 
rail.  This  was  more  expensive  in  any  event;  but  for  some 
years  they  found  their  handicap  greatly  increased  by  the 
refusal  of  the  New  Haven  road  to  join  in  any  joint  through 
rate.  The  western  independents,  therefore,  had  to  pay  the 
sum  of  two  local  rates,  up  to  and  beyond  the  Hudson  river, 
thereby  bringing  their  transportation  up  to  approximately 
thirty  cents  per  hundred  pounds.  In  other  words,  their  cost  of 
carriage  per  gallon  was  enhanced  more  than  enough  to  consti- 
tute a  fair  refuiing  profit  in  itself.  The  result  was  the  practical 
exclusion  of  competition  from  this  source.  Fortunately,  how- 
ever, after  this  investigation  the  New  Haven  was  ordered  to 
pro-rate  with  the  western  roads,  thereby  overcoming  about 
half  of  this  disability.  This  case  clearly  evinces  the  necessity 
of  effective  Federal  regulation  of  such  matters  as  joint  rates; 
and  it  also  shows  how  possible  it  may  be  to  so  adjust  tariffs, 
openly  and  even  legally,  as  to  favor  one  shipper  over  another. 
Unlike  the  preceding  instance,  most  of  the  Standard's  re- 
bates have  been,  in  fact  if  not  technically,  secret.  Perhaps  the 
most  flagrant  case  occurred  in  the  rates  from  Whiting  to  the 
southeastern  states.  The  Bureau  of  Corporations  estimated 
1  11  I.C.C.  Rep.,  55S;  U.  S.  Bureau  Corp'ns  Rep.,  p.  148. 


PERSONAL  DISCRIMINATION  203 

that  $70,000  a  year  was  saved  by  this  device;  and  all  compe- 
tition from  independent  sources  was  eliminated  within  that 
territory.  The  Illinois  Central  and  Southern  roads  cross  at  an 
obscure  point  in  Tennessee  knowTi  as  Grand  Junction.  This 
was  made  a  centre  of  distribution  for  the  entire  South.  ^  But 
the  rate  under  which  the  oil  moved,  —  and  in  one  given  month 
169  carloads  were  thus  carried,  —  was  given  on  a  special  tariff, 
publicly  filed  at  Washington,  to  be  sure,  but  prescribing  the  rate, 
not  from  Whiting  but  from  Dalton,  Illinois,  to  Grand  Junction, 
Tennessee.  Dalton  was  an  almost  unknown  station,  near  the 
refinery.  Of  course  any  other  shipper  who  happened  to  know 
of  it,  and  who  happened  to  have  oil  to  ship  from  Dalton  to 
Grand  Junction,  could  have  had  the  same  rate  of  thirteen  cents 
a  hundred  pounds.  But  he  would  find  it  moved  over  a  round- 
about route,  over  four  different  connecting  lines,  instead  of  over 
the  rails  of  a  single  company.  As  against  this  rate  of  thirteen 
cents,  the  only  routes  known  to  the  Ohio  independent  producers 
charged  from  nineteen  to  twenty-nine  and  one-half  cents  per 
hmidred  pounds.  Meantime  the  Standard's  oil  was  by  this  de- 
vious means  reaching  every  point  in  the  South  at  prices  which 
no  competitor  could  hope  to  meet.  In  one  case,  the  oil  going  by 
way  of  Grand  Junction,  travelled  over  one  thousand  miles  when 
the  direct  route  from  Chicago  was  only  a  little  over  five  hun- 
dred miles.  The  adjustment  was  everywhere  such  that,  even  on 
the  commonly  known  tariffs,  WTiiting  enjoyed  a  special  advan- 
tage over  the  sources  of  independent  oil.  Atlanta,  Georgia,  is 
only  733  miles  by  short  line  and  1003  miles  by  way  of  Grand 
Junction  from  Whiting.  Toledo,  with  its  independent  refineries, 
is  distant  only  687  miles.  Yet  despite  this  fact,  the  commonly 
known  rates  were  shown  to  be,  from  Whiting,  33.2  cents  as 
against  47.5  cents  from  Toledo.  So,  even  without  the  Grand 
Junction  contrivance,  the  Standard  was  seemingly  favored  more 
than  enough.  It  should  be  added,  in  conclusion,  that  while 
the  Grand  Junction  rate  was  pubUcly  filed,  its  discriminatory 
1  Routes  shown  by  the  map  on  p.  647,  infra. 


204  RAILROADS 

character  stands  proven  by  the  fact  that  all  the  actual  ship- 
ments were  "blind  billed;"  that  is  to  say,  no  local  agent  knew 
what  was  the  rate  actually  paid.  Such  blind  bills  of  lading 
are  photographically  reproduced  in  the  report  above  named. 
Moreover  the  ill  repute  of  the  transaction  was  indicated  by 
the  prompt  cancellation  of  the  rate  when  discovered  in  1905. 
But  in  the  meantime  it  had  done  its  work,  and  fixed  monopoly 
prices  for  an  indispensable  product  over  a  quarter  of  the  terri- 
tory of  the  United  States. 

Aside  from  the  palpably  dishonest  secret  rebating,  the  real 
root  of  the  difficulty  with  many  of  the  other  big  shippers  beside 
the  Standard  Oil  Company,  —  and  an  abuse  moreover  exceed- 
ingly hard  to  correct,  —  is  the  open  adjustment  of  rates  from 
competing  centres  of  manufacture  or  distribution  in  such  a 
way  as  to  confer  favors.  The  Bureau  of  Corporations'  report 
on  the  Transportation  of  Petroleum  Products  deals  fully  with 
this.  Relative  rates,  as  above  stated,  always  seem  to  favor 
Chicago  (Whiting)  as  against  the  centres  of  independent  re- 
fining such  as  Cleveland,  Pittsburg,  or  Toledo.  Formerly, 
before  the  great  refinery  was  established  in  1890  at  Whiting,  — 
which,  by  the  way,  produces  one-third  of  all  the  kerosene  used 
in  the  United  States,  —  the  roads  from  these  centres  made  joint 
through  rates  all  over  the  country.  They  still  do  so  on  many 
other  commodities.  But  on  petroleum  products  they  have 
been  withdrawn.  The  result  is  that  everywhere,  except  where 
they  can  secure  entrance  by  water,  the  disability  in  rates 
against  the  independent  refiner  is  most  effective.  That  much 
the  same  conditions  prevail  in  other  lines  of  business  is  affirmed 
on  the  highest  authority.  The  Railway  Age  Gazette  has  re- 
peatedly protested  against  the  pressure  which  is  now  brought 
to  bear  against  the  carriers  by  such  organizations  as  the  Illi- 
nois Manufacturers'  Association  to  substitute  open  })ut  dis- 
crimmatory  local  rates  for  the  old  secret  favors  upon  which 
the  great  shippers  throve  for  so  many  years.  Fortunately, 
however,   this  situation  in  some   cases  relieves  the   Federal 


PERSONAL  DISCRIMINATION  205 

government  of  the  burden  of  detection  of  mal-adjustments  of 
this  sort.  For  the  communities  aggrieved  are  constantly  on 
the  watch  to  protect  their  interests  against  rival  cities.  This 
factor  clearly  appears  in  the  sugar  and  cement  hghterage  cases 
in  1908.^  Carriers  at  New  York  in  order  to  equalize  rates  with 
carriers  serving  Philadelphia  refineries,  grant  "accessorial 
allowances"  for  the  use  of  lighters  or  for  cartage,  in  order,  as 
they  aver,  to  overcome  the  disability  against  their  clients. 
But  Philadelphia  shippers  are  ever  on  the  alert  to  detect  such 
favors  given  at  New  York;  and  substantially  aid  the  govern- 
ment in  eradicating  the  evil.  In  the  grain  elevator  allowance 
cases,  likewise,  at  Omaha  and  Council  Bluffs  in  1906-1909, 
not  only  unfavored  shippers  at  these  points  but  St.  Louis  grain 
merchants  as  a  body,  intervened  as  complainants  against  the 
system.  The  powerful  motive  of  self-interest  thus  invoked  is 
of  great  service. 

Before  dismissing  these  recent  and  widely  "muck-raked" 
oil  cases,  it  may  not  be  out  of  place  to  mention  the  new  inter- 
pretation of  the  Elkins  law  which  has  resulted  therefrom. 
One  concerns  the  definition  of  separate  offences.  In  the  noto- 
rious $29,000,000  fine  case,  the  Federal  Circuit  judge  applied 
the  maximum  penalty  of  $20,000  for  each  offence  to  each 
separate  carload  in  a  large  aggregate  of  shipments.  On  review 
of  the  case,  each  separate  settlement  of  freight  rates  was  de- 
fined as  the  unit  of  an  offence.  As  entire  train  loads  had  been 
forwarded  or  paid  for  at  one  time,  this  materially  reduced  the 
aggregate  of  possible  penalties.  And,  in  the  second  place,  the 
question  of  legally  provable  intent  was  raised.  The  turning 
point  in  the  $29,000,000  fine  case,  was  the  ruling  of  the  judge 
on  review,  that  it  was  necessary  to  prove  that  a  standard  rate, 
higher  than  the  one  actually  paid,  had  actually  been  filed  at 
Washington;   and  that  the  defendant  had  knowingly  accepted 

1  20  I.C.C.  Rep.,  200,  with  dissenting  opinion.  Reviewed  by  the  U.  S. 
Commerce  Court  1912;  Railway  Age  Gazette,  chap.  LII,  p.  1550.  P.  586, 
infra. 


206  RAILROADS 

a  concession  from  this  figure.  These  points  the  government 
was  unable  in  fact  to  estabUsh;   and  this  ended  the  case.^ 

While  general  rate  cutting  has  been  less  common  since 
1900,  partly  also  because  the  roads  were  rapidly  forming  great 
combinations  especially  in  order  to  eliminate  it,  subsequent 
developments  have  proved  that  personal  and  secret  favoritism 
to  large  shippers  was  still  very  common.  Despite  all  they 
could  do  to  withstand  pressure,  traffic  managers  seemed  power- 
less ^vithout  the  aid  of  the  law.  Perhaps  the  greatest  revela- 
tion of  the  extent  of  personal  rebating  was  afforded  by  the 
great  Wisconsin  investigation  under  the  leadership  of  Governor 
La  Follette  in  1903.^  The  original  purpose  of  this  inquiry  was 
fiscal;  namely,  to  examine  into  the  subject  of  railroad  taxation. 
But  its  scope  speedily  widened,  and  at  last  skilled  account- 
ants were  put  into  the  books  of  all  the  railroads  traversing 
Wisconsin. 

The  facts  elicited  by  the  Wisconsin  investigation  were  start- 
ling. For  the  years  1897-1903,  the  direct  rebates  appearing 
in  the  accounts  of  the  Wisconsin  lines  alone,  —  taking  no 
account  of  other  forms  of  rebates  such  as  excessive  damage 
allowances  and  the  like,  —  were  $7,000,000.  The  Chicago 
and  Northwestern  alone  had  allowed  more  than  half  of  this 
amount.  And  from  what  is  now  kno^vn  of  other  forms  of 
allowance,  the  total  must  have  been  indeed  very  great.  In 
one  year  recently,  there  was  evidence  to  the  effect  that  rebates 
on  the  New  York  Central  lines  amounted  to  $1,000,000.  Ac- 
cording to  its  own  admission,  the  Michigan  Central  road,  in 
1902-1903,  made  allowances  of  $586,000.  The  rebating  to  the 
beef  packers,  especially  on  export  business  during  1902,  was 
notorious.  No  wonder  the  progressive  railroad  leaders  desired 
to  put  an  end  to  this  leakage  of  revenue.     And  at  their  request, 

lU.  S.  Circuit  Court  of  Appeals,  decided  March  12,  1902.  The 
history  is  in  Ann.  Rep.,  I.C.C,  1907,  p.  114;  1908  pp.  26  and  36;  and 
1909,  p.  26. 

'  Never  pubHshed.  Outlined  in  Wisconsin  Assetnbly  Journal,  1905, 
chap.  II,  pp.  1463-1497. 


PERSONAL  DISCRIMINATION  207 

the  wise  legislation  known  as  the  Elkins  Amendments  to  the 
Act  to  Regulate  Commerce  was  passed  in  1903.^ 

The  Elkins  law  of  1903  not  only  came  at  a  time  when  the 
carriers  were  in  need  of  every  cent  of  revenue  to  tide  over  a 
hard  year,  but  it  also  followed  demonstration  under  the  test 
of  judicial  procedure,  that  convictions  for  rebating  were  prac- 
tically impossible  under  the  old  law.  To  convict  for  unjust 
discrimination  it  was  necessary  to  show,  not  merely  the  allow- 
ance to  one  favored  shipper,  but  the  fact  also  had  to  be  proved 
that  no  such  allowances  were  made  to  others  on  the  same  sort 
of  traffic  under  similar  conditions.  This  could  scarcely  ever 
be  done.  In  fact,  during  almost  twenty  years,  there  had  been 
less  than  a  score  of  convictions.  Most  of  the  prosecutions  had 
failed  utterly.  Both  government  and  carriers  pressed  for 
legislation.  This  was  promptly  given  in  the  Act  of  February 
19,  1903.  There  were  four  important  features  of  this  law. 
Railway  corporations,  not  merely  individuals  as  before,  were 
now  made  directly  liable  to  prosecution  and  penalties.  The 
tariff  filed  became  the  lawful  standard.  The  fact  that  all 
shippers  got  the  same  low  rate  was,  therefore,  no  longer  a  de- 
fence. In  the  third  place,  the  shipper  as  well  as  the  carrier 
could  be  held  accountable.  In  other  words,  accepting  as  well 
as  giving  rebates,  became  unlawful.  And,  finally,  jurisdiction 
was  conferred  upon  the  Federal  courts  to  restrain  any  depart- 
ure from  published  rates  or  any  "discrimination  forbidden  by 
law"  by  writ  of  injunction.  This  fully  legalized  a  rather  doubt- 
ful course  of  procedure  to  which  the  Interstate  Commerce 
Commission  had  been  compelled  to  resort  as  a  last  weapon  in 
the  rate  wars  on  grain  and  beef  since  1901.  It  also  abolished 
the  penalty  of  adjustment;  imposing  fines  instead.  But  this 
action  was  subsequently  rescinded  in  the  law  of  1906. 

The  record  of  the  vigorous  prosecutions  against  rebating 
under  the  Elkins  law,^  affords  conclusive  evidence,  not  only  as 

1  C/.  p.  492,  infra. 

^  Cf.  59th  Congress,  1st  Session,  Senate  Doc.  526. 


208  RAILROADS 

to  the  widespread  extent  of  the  evil,  but  as  to  its  identification 
with  many  of  the  large  industrial  combinations.  The  history 
of  the  activities  of  the  Interstate  Commerce  Commission  is 
to  be  found  in  its  file  of  annual  reports.  But  little  seems  to 
have  been  done  for  the  first  two  years;  but  great  activity  was 
displayed  during  1905.  The  ensuing  year  was  rather  notable 
by  reason  of  the  success  in  securing  convictions.  Besides  the 
Standard  Oil  cases,  there  was  collected  in  fines  for  rebating  be- 
tween October,  1905,  and  March,  1907,  the  sum  of  $586,000. 
Several  men  were  sent  to  jail,  for  from  three  to  six  months. 
Among  the  trusts  imphcated  were  the  beef  packers,  who  have 
been  indefatigable  in  concocting  rebating  devices;  the  tin 
plate  combination;  and,  most  notable  of  all,  the  American 
Sugar  Refining  Company.  Nearly  $300,000  in  fines  was  im- 
posed upon  this  concern  alone.  The  secret  allowances  in  these 
cases  were  most  ingeniously  arranged.  Some  were  ''refund 
of  terminal  charges;"  some  were  ''lighterage  demurrage;" 
some  were  allowances  for  damages.  Many  were  paid  by 
drafts  instead  of  checks  so  as  to  preclude  identification  of 
individuals;  some  were  by  special  bank  account;  but  the  sums 
involved  were  very  large.  Shipments  of  sugar  on  which  rebates 
of  four  to  six  cents  per  hundred  were  given,  amounted  within 
a  relatively  brief  period  to  upwards  of  70,000,000  pounds  on 
one  line  alone.  As  sugar  shipments  westbound  from  New  York 
constituted  nearly  one-third  of  the  total  tonnage,  the  import- 
ance of  these  prosecutions  appear.  The  following  quotation 
from  a  letter  from  an  agent  of  the  sugar  trust  accompanying 
a  claim  for  overcharge  of  $6,866  on  shipments  of  syrup,  intro- 
duced in  evidence  in  one  of  these  cases,  aptly  describes  the 
situation,  both  then,  now,  and  always.  "We  hope  to  devise 
some  means  to  enable  us  to  conduct  our  freight  matters  with 
the  transportation  companies  satisfactorily  even  under  the 
new  conditions  imposed  by  the  Elkins  bill;  but  there  may  be 
some  cases  that  cannot  be  taken  care  of,  in  the  event  of  which 
we  will,  like  all  other  shippers,  have  to  take  our  medicine  and 


PERSONAL  DISCRIMINATION  209 

look  pleasant."  The  Interstate  Commerce  Commission  re- 
ported as  to  the  conditions  in  1908  that  "many  shippers  still 
enjoy  illegal  advantages."  Many  convictions  were,  however, 
secured.  And  investigations  in  California  showed  the  exist- 
ence of  an  extensive  system  of  preferential  rates.  ^  A  list  of 
108  firms  was  discovered  on  the  Southern  Pacific  road  alone, 
who  were  enjoying  "special  inside  rates"  which  often  aggre- 
gated $50,000  per  month.  Many  of  these  assumed  the  form  of 
refunds  upon  claims  for  damages. 

Thus  the  rebate  as  an  evil  in  transportation,  even  since 
amendment  of  the  law  in  1906-1910,  while  under  control,  is 
still  far  from  being  eradicated.  Favoritism  lurks  in  every 
covert,  assuming  almost  every  hue  and  form.  Practices  which 
outwardly  appear  to  be  necessary  and  legitimate,  have  been 
shown  to  conceal  special  favors  of  a  substantial  sort.  Among 
the  latest  forms,  undue  extension  of  credit  may  be  mentioned. 
It  appeared,  for  instance,  in  1910  that  the  Hocldng  Valley  Rail- 
road was  favoring  the  Sunday  Creek  Coal  Company  to  the 
extent  of  credit  for  transportation  on  its  books  to  the  amount 
of  $2,400,000.2  Another  device  which  amounted  to  favoritism 
whether  so  intended  or  not,  has  been  brought  into  court  upon 
prosecution  of  the  so-called  Beef  Trust.  Substantial  conces- 
sions in  the  rate  from  Kansas  Cit}^  to  various  foreign  countries 
prevailed  by  reason  of  the  fact  that  long  time  contracts  for 
shipments  at  an  established  rate  continued  after  a  new  higher 
general  tariff  had  been  put  into  effect.  This  increase  of  rates 
in  general,  leaving  the  trust  rates  at  the  old  figure,  of  course 
created  an  undue  and  unlawful  preference.^  The  chapter 
might  be  further  ampUfied  by  details  concerning  "substitution 
of  tonnage  at  transit  points;"  ■*  excessive  allowance  for  claims, 
and,  as  in  a  recent  important  case  against  the  New  York  Cen- 

1  13  I.C.C.  Rep..  123. 

2  Ann.  Rep.,  I.C.C,  1910,  p.  10. 

3  Idem,  1909,  p.  32.  Circuit  Court  of  Appeals  decision,  April  29,  1911, 
Ann.  Rep.,  I.C.C,  1908,  p.  32. 

*  18  I.C.C  Rep.,  280.     Cf.  p.  401,  infra. 

VOL.  I — 14 


210  RAILROADS 

tral,  exorbitant  rates  paid  for  advertising  in  a  theatrical  publi- 
cation, in  order  to  secure  transportation  for  an  itinerant  troupe 
of  travelling  players.^ 

The  extreme  subtlety  of  personal  favoritism  was  recently 
brought  to  light  in  connection  with  the  selling  price  of  coal  in 
the  little  town  of  Durham,  North  Carolina.^  Complaint  was 
entered  that  a  certain  retailer  was  charging  but  five  dollars  a 
ton  while  his  competitors  were  unable  to  dispose  of  theirs  at  a 
profit  for  less  than  six  dollars.  The  explanation  offered,  that 
this  person  employing  no  bookkeeper  and,  paying  no  rent,  was 
enabled  to  do  this  because  of  these  savings,  proved  inadequate. 
Investigation  developed  the  fact  that  no  direct  preference  from 
railroads  existed,  but  that  there  were,  nevertheless,  various 
peculiar  features  as  to  division  of  rates  which  invited  further 
examination.  Thus,  for  example,  while  the  Norfolk  &  West- 
ern received  $30.80  for  hauling  a  carload  of  coal  160  miles, 
the  Durham  &  South  Carolina  Railroad  received  $24.80  for 
hauling  the  same  car  one  mile.  This  little  railroad  was  owned 
by  a  lumber  company  which  seemed  in  effect  to  have  set  up 
the  defendant  coal  merchant  in  business.  An  arrangement 
between  this  little  switching  road  and  the  Seaboard  Air  Line, 
as  well  as  the  Norfolk  &  Western,  also  favored  the  Durham 
&  Southern.  The  key  to  the  situation  lay  in  the  fact  that 
the  Dukes, — powerful  financial  interests  controlling  the  Ameri- 
can Tobacco  Company,  the  Southern  Power  Company  and 
large  cotton  mills,  —  also  controlled  the  Durham  &  South- 
ern through  the  lumber  company.  The  Seaboard  Air  Line, 
therefore,  when  it  gave  to  this  little  switching  road  for  a  twenty- 
mile  haul,  about  forty  per  cent,  of  its  division  on  through 
business,  surreptitiously  conferred  a  heavy  bonus  upon  its 
little  connection.  It  must  have  lost  money  under  such  a 
division  of  rates.  The  only  conclusion  possible  is  that  this 
little  railroad  was  specially  favored  in  order  to  purchase  the 
goodwill  of  financiers  controlling  a  large  traffic  in  other  lines  of 

'  Boston  Transcript,  Feb.  20,  1912.  » 22  I.C.C.  Rep.,  51. 


PERSONAL  DISCRIMINATION  211 

business.  The  rebate,  however,  was  not  given  to  the  American 
Tobacco  Company,  but  constituted  a  comfortable  profit  "on 
the  side"  for  powerful  interests  in  its  management. 

The  elevation  cases  concerning  the  legitimacy  of  a  special 
payment  for  miloading  grain  in  private  elevators,  have  been 
under  dispute  for  years.  Their  validity  has  recently  been 
affirmed  by  the  Supreme  Court  in  an  important  decision  in 
1911.^  This  htigation  illustrates  the  difficulty  of  defining 
rebates  as  an  expression  of  personal  favoritism.  In  1899,  the 
Union  Pacific  Railroad  made  a  contract  with  Peavey  &  Com- 
pany at  Council  Bluffs  to  erect  an  elevator  and  to  transfer  grain 
for  a  charge  of  one  and  one-quarter  cents  a  hundred  pounds. 
This  arrangement  was  objected  to  by  competing  railroads  on 
the  ground  that  it  gave  compensation  to  a  private  concern, 
engaged  in  general  grain  business  for  the  handling  of  its  own 
property.  The  Union  Pacific  insisted  that  the  expedient  was 
necessary  and  proper  as  a  means  for  promptly  unloading  its 
cars  at  Omaha.  The  Commission,  after  investigation,  sanc- 
tioned the  contract.  In  1907,  the  matter  again  came  before 
the  Commission  upon  complaint  of  other  railroads  competing 
with  the  Union  Pacific  along  the  Missouri  river.  It  was  alleged 
that  the  continuance  of  the  elevator  allowance  by  the  Union 
Pacific  would  virtually  compel  all  other  roads  to  make  similar 
allowances.  Still  the  Commission  adhered  to  its  former  con- 
clusion that  undue  discrimination  did  not  result.  The  practice, 
however,  gradually  spread  until  all  the  roads  at  Missouri  river 
points  put  in  an  allowance  of  three-fourths  of  one  cent  as  an 
elevator  charge.  This  brought  forth  a  complaint  from  the  lines 
at  St.  Louis  that  traffic  was  being  diverted  from  that  point  as  a 
result ;  and  the  Commission,  once  more  considering  the  matter, 
held  that  the  practice  was  prejudicial  to  pubHc  interest.  Con- 
ditions, in  fact,  had  changed,  mainly  through  the  increase  of 
through  shipments  to  the  East  without  transfer  at  the  Missouri 

1  222  U.  S.,  42.  The  system  is  described  in  the  Railway  Age  Gazette, 
June  4,  1909. 


212  RAILROADS 

river.  The  Commission,  therefore,  held  that  when  such  trans- 
fer took  place,  it  was  for  the  accommodation  of  local  grain 
merchants,  who  ought  to  pay  for  the  service  rendered.  At 
this  stage  of  the  proceedings,  the  matter  went  to  the  Supreme 
Court  of  the  United  States  upon  appeal.  The  decision  finally 
upheld  the  Commission,  in  holding  that  the  payment  of  an 
elevation  allowance  was  not  unlawful,  but  that  if  paid  to  one 
elevator,  it  must  be  paid  to  all.  The  bearing  of  this  case  upon 
the  larger  issue,  of  payments  by  railroads  for  special  services 
rendered  by,  shippers  cannot  fail  to  be  of  great  importance  in 
the  future. 

The  use  of  the  industrial  railroad  as  a  means  of  preferential 
treatment  still  occasions  difficulty.^  The  case  is  simple  where 
but  one  shipper  makes  use  of  the  terminal  plant ;  but  where  a 
number  of  shippers  may  utilize  it  jointly,  it  becomes  difficult 
to  draw  the  line  between  pro-rating  allowances  and  actual 
rebates.  The  Manufacturers'  Railroad  Company,  with  twenty 
miles  of  track,  four  locomotives  and  one  hundred  and  ten 
employees,  serves  a  considerable  manufacturing  section  in 
South  St.  Louis.  A  majority  of  the  stock  of  this  terminal 
railroad  is  held  by  persons  controlling  the  Anheuser-Busch 
Brewery.  The  enormous  traffic  of  this  concern,  equal  to  about 
one-thirtieth  of  the  total  tonnage  of  St.  Louis,  is  handled  over 
the  line  of  the  Manufacturers'  Railway.  Almost  nine-tenths 
of  its  business  consists  of  shipments  of  beer;  but  in  1910 
some  5,424  carloads  belonging  to  other  patrons  moved  over  its 
rails.  For  this  terminal  service  the  Anheuser-Busch  Company, 
through  the  Manufacturers'  Railway,  got  a  very  substantial 
allowance  for  the  service  rendered.  For  example,  in  one  month 
on  ten  carloads  of  beer,  the  Louisville  &  Nashville  allowed 

^  21  LC.C.  Rep.,  304.  Compare  also  before  the  U.  S.  Commerce  Court; 
the  Stock  Yards  case,  192  Fed.  Rep.,  330;  the  CaUfornia  Switching  case, 
188  Fed.  Rep.,  229;  and  the  Crane  Iron  Works  case.  No. 55,  April  session, 
1912.  The  tap-Hne  decision,  23  I.C.C.,  277,  most  fully  discussed  the  gen- 
eral policy  to  be  observed  toward  industrial  roads  in  the  lumber  business. 
Cf.  also  the  use  of  boat  lines.     23  Idem,  358. 


PERSONAL  DISCRIMINATION  213 

out  of  a  total  revenue  of  $391.60  for  moving  the  traflSc 
something  less  than  four  thousand  feet.  The  disparity  is 
obvious  between  this  allowance  and  the  balance  remaining  as 
compensation  for  moving  the  traffic  477  miles,  including  three 
first-class  railroad  tolls  and  terminal  charges  at  the  other  end.^ 

A  prime  difiiculty  is  to  determine  whether  unduly  low 
commodity  rates  amount  practically  to  special  favors  granted 
to  large  shippers.  Much  evidence  recently  tends  to  show  that 
the  trusts  enjoy  advantages  of  this  sort  not  extended  to  other 
competitors.  The  Steel  Corporation,  through  its  ownership  of 
railroads  and  steamships,  certainly  has  a  great  advantage  over 
its  rivals. 2  But  other  trusts  not  controlling  common  carriers 
of  their  owti,  are  also  accorded  what  seem  to  be  unduly  low  rates 
upon  their  products.  Recent  evidence  before  the  Interstate 
Commerce  Commission  seems  to  show  that  sugar,  beef,  and 
coffee  do  not  bear  their  proper  share  of  transportation  costs.* 
Copper,  the  product  of  a  powerful  trust,  enjoys  a  lower  ton 
mile  rate  than  grain,  —  a  rate,  despite  its  high  intrinsic  value, 
actually  below  that  on  soft  coal.^  The  discrimination  is  too 
palpable  to  be  passed  over  without  explanation. 

From  the  survey  of  rebating  and  rate  wars,  — which  latter 
of  course  afford  the  most  favored  soil  in  which  personal  favor- 
itism may  flourish,  —  one  camiot  avoid  the  conclusion  that  a 
great  improvement  in  conditions  has  been  brought  about. 
The  strengthened  arm  of  the  Federal  government  has  come  to 
the  support  of  the  carriers;  and  has  assisted  them  to  a  material 
enhancement  of  their  revenues,  by  putting  a  stop  to  serious 
leakages  in  income.  But  the  carriers  could  undoubtedl}^  do 
much  on  their  own  account,  could  they  be  granted  the  right 
to  make  traffic  agreements,  subject  always,  of  course,  to  the 

1  Railway  Age  Gazette,  LII,  pp.  269  and  340. 

^  Evidence  before  the  Stanley  House  Committee  on  Steel  Corporation, 
Feb.  28,  1912,  p.  3667;  and  Bureau  of  Corporations  on  U.  S.  Steel  Cor- 
poration, II,  p.  72. 

*  American  Economic  Review,  1911,  p.  789. 

*  S.  O.  Dunn,  American  Transportation  Question,  pp.  62,  81. 


214  RAILROADS 

approval  and  supervision  of  the  Interstate  Commerce  Com- 
mission. Whether  Congress  will  ever  permit  this,  remains  to 
be  seen.  The  most  important  result  of  all  this  Federal  activity 
so  far,  has  been  the  moral  stimulus  toward  fair  business 
dealing  which  has  been  given.  Thousands  of  shippers  today, 
quite  apart  from  the  fear  of  fines  or  imprisonment,  would  dis- 
dain to  ask  or  accept  favors  which  a  decade  since  would  have 
been  regarded  as  entirely  proper.  No  one  can  doubt  that  the 
morale  of  business  is  distinctly  higher  than  it  used  to  be.  Could 
such  higher  standards  become  universal,  the  Department  of 
Justice  would  be  relieved  of  a  substantial  part  of  its  present 
duties. 


CHAPTER  VII 

LOCAL  DISCRIMINATION 

Concrete  instances,  215.  —  Hadley's  oyster  case  not  conclusive,  217.  — 
Two  variants:  lower  long-haul  rates  by  the  roundabout  route,  as  in 
the  Hillsdale,  Youngstown,  and  some  Southern  cases,  221;  or  by  the 
direct  route,  as  in  the  Nashville-Chattanooga  and  other  southern 
cases,  225.  —  Complicating  influence  of  water  transportation,  232.  — 
Market  competition  from  various  regions,  a  different  case,  234.  —  The 
basing  point  (southern)  and  basing  line  (Missouri  river)  systems,  238. 

—  Their  inevitable  instabiUty  and  probable  ultimate  abandonment, 
242.  —  Postage-stamp  rates,  illustrated  by  transcontinental  tariffs, 
245.  —  Which  line  makes  the  rate?  255.  —  Cost  not  distance,  deter- 
mines, 256.  —  Fixed  charges  v.  operating  expenses,  257.  —  Proportion 
of  local  business,  259.  —  Volume  and  stabiUty  of  traffic  important,  261. 

—  Generally  the  short  line  rules,  but  many  exceptions  occur,  263. 

Any  unreasonable  departure  from  a  tariff  graded  in  some 
proportion  according  to  distance  is  kno"«Ti  as  local  discrimina- 
tion. It  constitutes  one  of  the  most  difficult  and  perplexing 
problems  in  transportation.  Personal  discrimination  now 
happily  having  been  practically  eliminated  since  the  enact- 
ment of  the  Elkins  Amendments  to  the  Act  to  Regulate  Com- 
merce, this  issue  of  local  discrimination  under  the  rehabihtated 
long  and  short  haul  clause,  has  recently  assumed  an  added 
significance. 

A  merchant  of  Wilkesbarre,  Pennsylvania,  purchased  a 
carload  of  potatoes  at  Rochester,  New  York,  and  had  the 
freight  bill  made  for  a  delivery  to  Philadelphia,  because  the 
freight  to  Philadelphia  was  less  than  it  was  to  Wilkesbarre, 
which  is  143  miles  nearer.  He  stopped  the  potatoes  at  Wilkes- 
barre, unloaded  them,  and  paid  the  freight.  A  few  days  later 
he  received  a  bill  from  the  Lehigh  Valley  Company  for  twelve 
dollars  additional  freight.  If  the  potatoes  had  gone  to  Phila- 
delphia,  he  would  have  paid  forty-eight  dollars  freightage. 


216  RAILROADS 

As  they  stopped  at  Wilkesbarre,  he  had  to  pay  sixty  dollars; 
that  is,  twelve  dollars  for  not  hauling  the  carload  143  miles.  ^ 

A  merchant  in  Montgomery,  Alabama,  shipped  two  car- 
loads of  fruit  jars  from  Crawfordsville,  Indiana,  to  Montgom- 
ery. He  shipped  them  to  Mobile  and  then  paid  the  local 
rate  from  Mobile  back,  those  fruit  jars  going  through  Mont- 
gomery on  the  way  out.  By  having  them  hauled  350  miles 
farther,  he  saved  seventy-five  dollars  on  the  two  carloads. 

On  first-class  goods,  at  one  time,  the  rate  from  Louisville 
to  Montgomery,  was  $1.26  per  hundredweight.  On  to 
Mobile,  180  miles  further  south,  it  was  only  ninety  cents. 
In  the  same  territory  the  rate  on  kerosene  oil  from  Cin- 
cinnati at  times  has  been  three  times  as  much  to  interior 
points  as  to  New  Orleans,  three  times  as  far.  West  of  the 
Missouri  river  and  in  the  Rocky  mountain  area  similar  com- 
plaints are  common.  Denver,  Colorado,  pays  $1.79  per  hun- 
dredweight on  cotton  piece  goods,  in  small  lots,  hauled  2,000 
miles  from  Boston;  while  the  rate  to  San  Francisco,  1,400 
miles  further  away,  on  the  same  line,  is  only  $1.50.  This 
discrepancy  is  even  greater  in  wholesale  rates.  No  carload 
rating  is  given  to  Denver;  while  for  similar  shipments  to  the 
coast  the  rate  is  only  one  dollar  per  hundredweight.  In  the 
opposite  direction,  sugar  is  carried  from  San  Francisco  through 
Denver  to  Kansas  City  for  sixty-five  cents  per  hundredweight, 
as  compared  with  a  rate  of  one  dollar  if  the  sugar  is  stopped  at 
Denver.  Smaller  places  in  the  West  afford  equally  striking 
instances.  The  rate  on  rope  from  San  Francisco  to  Independ- 
ence, Kansas,  is  seventy-five  cents;  while  the  same  goods  are 
hauled  on  through  Independence,  Kansas,  much  farther,  to 
Missouri  river  points  for  sixty  cents  per  hundred  pounds. 
Wichita,  Kansas,  complains  that  cotton  piece  goods  from  New 
York  by  way  of  Galveston  are  rated  at  $1.36;    while  by  the 

'  Cullom  Committee,  Report,  Testimony,  p.  532.  CJ.  instances  in 
Hudson's  Railways  and  the  Republic;  and  Parson's  Heart  of  the  Railway 
Problem  as  showing  popular  misunderstanding. 


LOCAL  DISCRIMINATION  217 

same  route  Kansas  City,  225  miles  longer  haul  by  that 
route,  the  charge  is  only  ninety-three  cents.  The  South- 
western Lumberman's  Association  complains,  — 

"that  a  train  of  cars  of  lumber  starts  from  Camden  or  other  common 
point  in  Texas  via  Atchison,  Topeka  and  Santa  Fe  Railway,  and  one 
car  is  dropped  off  in  Oklahoma  at  27|  cents  per  100  pounds;  one  each 
also  at  Wichita  and  Emporia,  Kansas,  at  27^  cents  per  100  pounds; 
one  at  Kansas  City  at  23  cents,  and  two  cars  also  set  off  this  same  train 
at  Kansas  City,  destined  for  Omaha  and  Lincoln,  Nebraska,  at  23  and 
24  cents  per  100  pounds,  respectively.  The  balance  of  this  train,  now 
at  Kansas  City,  runs  on  to  Chicago,  and  24  cents  per  100  pounds  is 
the  charge  then  for  most  of  the  train  which  is  left  there.  .  .  .  ^Yhy 
should  builders  of  homes  in  Wichita  and  Emporia,  Kansas,  pay  higher 
freight  than  builders  in  Kansas  City,  Omaha,  and  Cliicago  when  using 
yellow  pine  from  Texas?"  ^ 

Such  instances  as  these  might  be  multipHed  indefinitely. 
They  are  often  striking  in  character.  The  first  impression  is 
of  intolerable  abuse.  The  simplest  tenets  of  justice  and  fair 
dealing  appear  to  be  violated.  Careful  analj^sis  should,  how- 
ever, always  be  made  before  drawing  such  conclusions.  Rail- 
road practice  seldom  departs  so  flagrantly  from  the  fundamental 
consideration  of  cost  of  service  without  very  substantial  eco- 
nomic justification. 

The  reasoning  underlying  local  discrimination  is  admirably 
set  forth  by  President  Hadley  in  the  following  passage  from 
his  Railroad  Transportation  :  —  ^ 

"On  the  coast  of  Delaware,  a  few  years  ago,  there  was  a  place 
which  we  shall  call  X,  well  suited  for  oyster-gro^vdng,  but  which  sent 
very  few  oysters  to  market,  because  the  railroad  rates  were  so  high 
as  to  leave  no  margin  of  profit.  The  local  oyster-growers  represented 
to  the  railroad  that  if  the  rates  were  brought  down  to  one  dollar  per 
hundred  pounds,  the  business  would  become  profitable  and  the  rail- 
road could  be  sure  of  regular  shipments  at  that  price.  The  railroad 
men  looked  into  the  matter.  They  found  that  the  price  of  oysters  in 
the  Philadelphia  market  was  such  that  the  local  oystermen  could 
pay  one  dollar  per  hundred  pounds  to  the  railroad  and  still  have  a 

1  Senate  (Elkins)  Committee  Report,  1905,  p.  1892. 

2  Pp.  116-117. 


218  RAILROADS 

fair  profit  left.  If  the  road  tried  to  charge  more,  it  would  so  cut  down 
the  profit  as  to  leave  men  no  inducement  to  enter  the  business.  That 
is,  those  oysters  would  bear  a  rate  of  one  dollar  per  hundred,  and  no 
more.  Further,  the  railroad  men  found  that  if  they  could  get  every 
day  a  carload,  or  nearly  a  carload,  at  this  rate,  it  would  more  than 
cover  the  expense  of  hauling  an  extra  car  by  quick  train  back  and  forth 
every  day,  with  the  incidental  expenses  of  interest  and  repairs.  So  they 
put  the  car  on,  and  were  disappointed  to  find  that  the  local  oyster- 
growers  could  only  furnish  oysters  enough  to  fill  the  car  about  half 
full.  The  expense  to  the  road  of  rumiing  it  half  full  was  almost  as 
great  as  of  running  it  full;  the  income  was  reduced  one-half.  They 
could  not  make  up  by  raising  the  rates,  for  these  were  as  high  as  the 
traffic  would  bear.  They  could  not  increase  their  business  much  by 
lowering  rates.  The  difficulty  was  not  with  the  price  charged,  but 
with  the  capacity  of  the  local  business.  It  seemed  as  if  this  special 
service  must  be  abandoned. 

"One  possibility  suggested  itself.  At  some  distance  beyond  X, 
the  terminus  of  this  railroad,  was  another  oyster-growing  place,  Y, 
which  sent  its  oysters  to  market  by  another  route.  The  supply  at  Y 
was  very  much  greater  than  at  X.  The  people  at  Y  were  pajdng  a 
dollar  a  hundred  to  send  their  oysters  to  market.  It  would  hardly 
cost  twenty  cents  to  send  them  from  Y  to  X.  If,  then,  the  railroad 
from  X  to  Philadelphia  charged  but  seventy-five  cents  a  hundred  on 
oysters  which  came  from  Y,  it  could  easily  fill  its  car  full.  Tliis  was 
what  they  did.  They  then  had  half  a  carload  of  oysters  grown  at 
X,  on  wliich  they  charged  a  dollar,  and  half  a  carload  from  Y  on  which 
they  charged  seventy-five  cents  for  exactly  the  same  service. 

"Of  course  there  was  a  grand  outcry  at  X.  Their  trade  was  dis- 
criminated against  in  the  worst  possible  way  —  so  they  said  —  and 
they  complained  to  the  railroad.  But  the  railroad  men  fell  back  on 
the  logic  of  facts.  The  points  were  as  follows:  1.  A  whole  carload 
at  seventy-five  cents  would  not  pay  expenses  of  handling  and  moving. 
2.  At  higher  rates  than  seventy-five  cents  they  could  not  get  a  whole 
carload,  but  only  half  a  carload;  and  half  a  carload  at  a  dollar  rate 
(the  highest  charge  the  article  would  bear)  would  not  pay  expenses. 
Therefore,  3.  On  any  uniform  rate  for  everybody,  the  road  must  lose 
money,  and  4.  They  would  either  be  compelled  to  take  the  oyster 
car  away  altogether,  or  else  get  what  they  could  at  a  dollar,  and  fill 
up  at  seventy-five  cents.  There  was  no  escape  from  this  reasoning; 
and  the  oyster  men  of  X  chose  to  pay  the  higher  rate  rather  than  lose 
the  service  altogether." 

The  logic  of  this  oyster  case  seems  convincing  in  its  simplic- 
ity. But  it  presents  more  complications  than  appear  at  the 
outset. 


LOCAL  DISCRIMINATION 


219 


First  of  all,  what  is  the  nature  of  the  competition  at  the 
more  distant  point  which  is  alleged  to  "compel"  the  lower 
rate?  Is  it  merely  of  rival  routes  or  of  competing  markets? 
It  will  be  ad\dsable  to  keep  the  two  distinct  so  far  as  possible. 
Under  the  first  heading,  competition  of  routes,  the  subjoined 
sketches  represent  two  possible  situations.  In  both  instances, 
however,  Y,  enjojing  the  lower  rate,  is  more  distant  from 


A 


B 


--X 


PKILAPELPXIA 


PKILAPE.LPKIA 


Philadelphia  than  X.  The  difference  between  the  two  arises 
from  the  fact  that  in  the  one  case  X  is  nearer  Philadelphia 
than  Y  on  a  roundabout  line;  while  in  the  other  X  is  actually 
nearer  than  Y  by  the  shortest  direct  route.  We  may  safely 
assume  that  the  compelling  competition  alleged  at  Y  as  justi- 
fying the  lower  rate  is  by  rail;  as,  the  commodity  being  a 
marine  bivalve,  both  places  presumably  enjoy  equal  facilities 
for  water  carriage.  At  all  events,  assuming  that  we  have  to 
do  with  competing  rail  routes  alone,  what  differences  obtain 
between  the  two  sets  of  circumstances  above  sketched?  Not 
insignificant  inequalities  in  the  length  or  power  of  the  two  routes 
are  implied  by  the  diagrams.  They  are  supposed  to  represent 
substantially  different  lines,  which  may,  for  the  purpose  of  the 
argument,  be  denominated  strong,  natural,  or  standard,  and 
weak,  unnatural,  or  abnormal,  respectively,  so  far  as  the  par- 


220  RAILROADS 

ticular  traffic  in  hand  is  concerned.  That  this  distinction  is 
not  irrelevant,  but  frequently  of  determinant  force,  is  shown 
by  an  analysis  of  concrete  cases  which  have  arisen  for 
adjudication. 

This  proposition  is  clear  beyond  dispute.  The  actual  cost 
of  service,  which  fixes  an  irreducible  minimum  rate  between 
Y  and  Philadelphia,  is  less  on  the  short  line  than  by  the  round- 
about one.  For  either  road  to  accept  less  than  the  portion  of 
the  cost  traceable  to  this  particular  traffic,  that  is  to  say,  the 
extra  cost  incident  to  its  acceptance,  is  economically  incon- 
ceivable. From  this  it  follows,  other  conditions  being  equal, 
that  the  shortest  line  between  Y  and  Philadelphia  rules  the  rate 
in  the  last  instance.  This  is  normally  the  case.  The  round- 
about route  thereafter  merely  accepts  the  rate  thus  compelled. 
To  permit  the  roundabout  line  to  rule  the  minimum  rate  would 
not  only  violate  a  fundamental  principle  of  operation:  it  would 
inevitably  lead  to  chaos.  The  analogy  with  cut-throat  compe- 
tition in  business  is  obvious.  It  is  equally  plain  that  the  mere 
acceptance  of  a  short  line  rate  by  a  roundabout  road,  so  long 
as  this  rate  is  adequate  to  yield  some  profit  over  the  extra  cost, 
while  of  advantage  to  some,  may  not  work  positive  injury  to 
any  one.  This  condition  normally  corresponds  to  the  state  of 
affairs  represented  by  diagram  A.  The  nearer  point,  X,  as 
Hadley  avers,  has  no  just  grievance  against  Y  because  the 
latter  has  the  good  fortune  to  have  a  direct  service  to  Phila- 
delphia at  a  low  rate.  For  Y  to  withdraw  shipments  from  the 
line  via  X  might  even  destroy  the  only  chance  of  X  for  a  market. 
It  would  also  deprive  Y  of  whatever  benefit  it  might  have 
derived  from  competition  either  of  routes  or  of  facilities.  Of 
course,  we  have  expressly  omitted  market  competition  as  a 
factor,  reserving  it  for  separate  treatment.  Yet  one  objection 
arises.  Normally,  the  direct  line  ought  to  maintain  a  tariff 
conforming  in  some  degree  to  the  distance  principle.  The 
roundabout  line  can  compete  at  Y  only  by  a  violation  of  it, 
unless,  indeed,  its  local  tariffs  be  graded  much  more  gradually. 


LOCAL  DISCRIMINATION  221 

In  other  words,  its  progression  towards  the  maximum  must  be 
distributed  over  a  much  longer  line.  Even  this  would,  on 
Hadley's  statement  of  fact,  ehminate  X  from  the  Philadelphia 
market.  Such  reduction  of  local  rates  upon  the  roundabout 
route  would  in  turn  discriminate  against  places  like  Z  on  the 
direct  line,  equally  distant  with  X  from  Philadelphia.  For 
the  latter  places  would  necessarily  be  assessed  at  a  higher  rate 
per  ton-mile.^  This  would  constitute  another  form  of  local 
discrimination,  which  will  be  discussed  in  due  time.  There 
is,  therefore,  at  best,  only  a  choice  of  adjustments,  either  of 
which  leads  to  some  form  of  inequality.  But,  upon  the  whole, 
balancing  the  evil  with  the  good,  the  first  variant  of  our  oyster 
case  appears  to  be  best  solved  by  according  all  shippers  at  Y 
a  somewhat  lower  rate  than  X  enjoys. 

Conditions  corresponding  to  diagram  A  have  frequently 
given  rise  to  complaints  before  courts  and  administrative 
tribunals.  An  interesting  illustration  is  afforded  by  the  Hills- 
dale ice  case  in  Michigan.^  Ice  was  moved  from  this  town  to 
Springfield  and  Columbus,  two  neighboring  Ohio  cities,  over 
several  different  routes.  (See  map  on  next  page.)  To  Colum- 
bus the  shortest  road  was  by  the  Hocking  Valley  Railroad 
directly  through  Toledo.  Another  route  by  way  of  Sandusky 
existed;  and  even  a  third  through  Sandusky,  thence  over  to 
Springfield,  and  in  by  the  side  door,  so  to  speak,  to  Columbus. 
This  last  routing  was  due  to  the  fact  that  the  Big  Four  road 
from  Sandusky  diagonally  across  to  Springfield  had  no  access 
to  Columbus  except  through  a  branch  line  from  Springfield. 
This  last-named  zigzag  route  was  295  miles  in  length  as  against 
190  miles  by  the  direct  line  through  Toledo.  To  Springfield, 
on  the  other  hand,  no  direct  route  from  Hillsdale  existed;  but 
freight  might  move  either  via  Sandusky  by  the  Big  Four  road 

^  Another  instance  is  afforded  by  the  Savannah  Freight  Bureau  case : 
7  Int.  Com.  Rep.,  458.     See  our  Raihvay  Problems,  chap.  XII. 

2  Interstate  Commerce  Commission  Reports,  decided  May  14,  1903. 
Cf.  the  extraordinary  diversion  of  traffic  over  the  long  route  in  Troy- 
Chatham,  N.  Y.  case:  23  I.C.C.  Rep.,  263. 


222 


RAILROADS 


or  through  Sandusky  and  around  by  way  of  Columbus.  The 
shortest  of  any  of  these  hnes  to  Springfield,  however,  was 
twenty-nine  miles  longer  than  the  shortest  line  to  Columbus. 
This  established  Columbus,  therefore,  as  normally  the  nearer 
point.  Complaint  arose  from  the  fact  that  ice  carried  over 
the  zigzag  route  to  Columbus  actually  passed  through  Spring- 


field and  forty-five  miles  beyond  to  reach  its  destination. 
For  such  shipments  over  the  Big  Four  road,  Springfield  in- 
stead of  Columbus  was  the  nearer  point.  But,  contrariwise, 
for  ice  coming  to  Springfield  through  Columbus,  the  latter  in 
turn  became  the  intermediate  point. ^  The  specific  complaint 
was  that  the  rate  by  all  routes  to  Springfield  was  one  dollar 
per  ton,  while  to  Columbus  it  was  only  eighty  cents.  Origi- 
nally, the  rate  was  higher  ($1.25  per  ton),  but  was  the  same  to 
both  points.     Is  this  a  case  of  local  discrimination  or  not? 

'  This  recalls  Traffic  Manager  Bird's  testimony  relative  to  Wisconsin 
controversies  before  the  Senate  (Elkins)  Committee,  1905. 


LOCAL  DISCRIMINATION  223 

The  Big  Four  ■  road  operating  through  Springfield  answered 
that  it  was  not  responsible  for  the  eighty  cent  rate  to  Columbus; 
that  this  was  made  by  the  direct  line;  and  that  it  obviously 
must  meet  this  rate  or  \A'ithdraw  from  the  ice  business.  It 
alleged,  moreover,  that  the  rate  of  one  dollar  was  reasonable 
in  itself  as  compared  with  other  rates  in  the  same  territory, 
and  was  in  fact  substantially  less  than  it  formerly  was;  nor 
would  its  withdrawal  from  Columbus  ice  business  evidently 
be  of  any  advantage  whatever  to  Springfield,  but  would  indeed 
deprive  it  of  some  small  contribution  to  joint  expenses  of  opera- 
tion on  all  its  tonnage.  No  evidence  being  offered  that  Spring- 
field was  positively  injured  by  this  adjustment,  the  Commission 
properly  dismissed  the  complaint. 

The  distinctive  feature  of  this  class  of  cases,  as  has  been 
said,  is  that  the  intermediate  point  preferring  the  complaint 
is  always  on  a  roundabout  route. ^  St.  Cloud,  Minnesota,  and 
Wichita,  Kansas,  whose  contentions  are  described  hereafter  in 
detail,  were  thus  situated.  The  so-called  "rare  and  peculiar" 
case  of  Youngstown,  Ohio,  cited  in  the  original  Louisville  and 
Nashville  decision  of  1889,  was  in  no  sense  different.  It  was  a 
case  of  pure  competition  of  routes.^  Traffic  to  New  York  was 
starting  its  journey  from  Pittsburg,  over  the  rails  of  the  same 
company,  in  exactly  opposite  directions.  Some  of  it  went  east 
by  the  direct  line;  while  other  freight  first  moved  due  west, 
thence  north,  by  way  of  YoungstowTi,  Ohio,  until  it  reached 
the  main  line  at  Erie,  which  took  it  on  to  New  York.  This 
traffic,  therefore,  described  three  sides  of  a  rectangle  in  reaching 
its  destination,  traversing  a  route  172  miles  longer  than  by  the 
direct  Ime.  The  issue  was  raised  by  a  demand  for  as  low  a 
rate  to  New  York  from  Youngsto^vn  as  Pittsburg  enjoyed,  on 
the  ground  that  it  was  nearer  New  York  by  this  indirect  line; 

1  Using  this  term  technically  as  described  on  p.  256,  infra. 

2  Chapter  XIV,  p.  480,  infra.  The  original  correspondence  setting 
forth  these  conditions  is  reprinted  by  the  Senate  (Elkins)  Committee,  1905, 
Digest,  App.  Ill,  p.  46.  21 1.C.C.  Rep.,  64,  and  17  Idem,  335  are  analogous 
cases. 


224  RAILROADS 

Pittsburg  traffic,  in  other  words,  passing  through  it  en  route 
to  the  seaboard.  The  reply,  of  course,  was  that,  although 
nearer  by  an  indirect  road,  it  was  more  distant  by  the  natural 
and  shortest  route,  and  consequently  should  pay  more  for  the 
service.  What  the  roundabout  line  was  really  demanding 
was  permission  to  compete  at  Pittsburg  for  New  York  business, 
without  being  compelled  to  reduce  its  local  rates  from  inter- 
mediate points  like  Youngstown.  In  other  words,  the  long 
line  was  demanding  exemption  from  the  long  and  short  haul 
clause,  while  the  direct  short  line  conformed  to  it.  Without 
such  exemption  it  could  not  continue  to  reach  out  for  Pitts- 
burg business,  as  the  loss  incident  to  reduction  of  its  local  rates 
would  outweigh  the  profit  in  the  competitive  tonnage. 

One  side  of  the  Savannah  Freight  Bureau  Fertilizer  case^ 

—  namely,  the  complaints  of  local  stations  on  a  roundabout  road 

—  brings  it  within  our  first  category.  The  roundabout  line 
from  Charleston  to  Valdosta,  shown  upon  the  map  at  p.  648, 
was  413  miles  long  as  against  a  direct  route  of  only  273  miles. 
Kathleen,  Georgia,  is  only  288  miles  out  from  Charleston  on 
this  indirect  line,  —  approximately  the  same  distance  as  Val- 
dosta, which  thus  corresponds  to  Y  in  the  oyster  case.  Yet 
Kathleen  paid  a  rate  of  $3.32  per  ton  on  fertilizer  from  Charles- 
ton as  against  $2.48  charged  to  Valdosta,  125  miles  beyond. 
But  this  excess  distance  is  by  an  indirect  route.  Most  of  the 
notable  English  cases  concerning  local  discrimination  appear 
to  be  of  the  same  stamp.^  The  complaints  of  a  number  of 
smaller  places  in  the  St.  Paul-Milwaukee  territory,  like  Cannon 
Falls,  Lacrosse,  and  Northfield  some  years  ago,  reduce  in  part 
to  the  same  thing.^  Whether  the  Troy,  Alabama,  and  Wichita, 
Kansas,  cases  belong  here  or  in  the  next  group  is  indeterminate, 
owing  to  the  difficulty  of  comparing  conditions  of  carriage  by 
rail  and  by  water,  respectively. 

'  7  Int.  Com.  Rep.,  4.58:  roprinted  in  our  Railwuy  Problems,  chap.  XII. 

2  Brief  of  Ed.  Baxter,  Alabama  Midland  Railway  case,  U.  S.  Supreme 
Court,  p.  71;  and  Acworth,  p.  83.     Details  in  chap.  XIV  and  XIX,  infra. 

3  14  I.C.C.  Rep.,  299. 


LOCAL  DISCRIMINATION  225 

On  the  other  hand,  the  set  of  circumstances  showTi  m  dia- 
gram B  (page  219,  supra)  is  of  quite  a  different  sort.  The 
justification  for  the  local  discrimination  is  much  less  clear. 
Here,  as  before,  the  distant  point  Y  enjoys  a  lower  rate  than  X 
because  of  the  presence  of  competition;  but  it  is  important 
to  inquire  both  as  to  the  nature  and  the  amount  of  it.  In  the 
first  case,  competitive  traffic  from  Y  was  extra  rather  than 
normal  in  character,  so  far  as  the  line  serving  X  was  concerned. 
It  was  relatively  small  in  amount.  Whatever  surplus  revenue 
resulted  from  it  aided  the  local  tariffs,  including  those  at  X, 
in  supporting  the  burden  of  fixed  expenses.  This  burden  they 
were  bound  to  bear  entirely  in  the  absence  of  competitive  busi- 
ness picked  up  at  Y.  The  distant  point  Y  of  course  had  no 
complaint  in  any  event,  and  the  chances  are  that  X  was  bene- 
fited, as  we  have  seen.  But  in  the  second  case  the  great  bulk 
of  the  traffic  from  Y  belongs  naturally  to  the  direct  line  through 
X.  It  constitutes  the  mainstay  of  its  business.  The  direct 
line,  unlike  the  roundabout  one,  cannot  withdraw  from  the 
field  when  rates  become  unremunerative.  It  is  in  this  business 
passing  directly  through  X  to  stay.  Nine-tenths  of  the  Y 
traffic,  perhaps,  moves  through  X  in  this  latter  case;  in  the 
former  one,  one-tenth  would  perhaps  measure  the  proportion 
of  the  indirect  line.  Under  this  assumption,  it  is  obvious  that 
the  question  of  the  level  of  rates  at  Y,  as  determined  by  the 
presence  of  competition,  assumes  a  ninefold  greater  importance 
in  the  eyes  of  X,  so  far  as  the  effect  upon  local  rates  in  support- 
ing the  fixed  and  joint  expenses  of  the  road  is  concerned.  In 
any  event,  even  the  line  operating  under  a  disability  supposedly 
earns  some  small  net  return  on  competitive  traffic,  else  it  would 
withdraw  from  the  field.  This  it  is  in  fact  free  to  do  at  any 
time;  and,  however  small  the  net  return,  it  is  at  least  all  gain. 
On  the  other  hand,  when  the  net  return  on  a  large  volume  of 
its  natural  business  becomes  unduly  small,  the  financial  stabil- 
ity of  the  direct  line  is  put  in  jeopardy.  The  danger  of  local 
rates  (as  at  X)  being  actually  enhanced  or  at  least  prevented 

VOL.  I — 15 


226  RAILROADS 

from  reduction,  because  of  an  unduly  low  level  of  competitive 
rates  at  more  distant  points,  is  thus  much  greater  when  X  is  a 
way  station  on  a  direct  line  than  when,  as  in  our  first  instance, 
it  is  an  intermediate  point  on  a  roundabout  route.  For  this 
reason  the  direct  line  through  X  is  at  the  outset  put  to  a  justi- 
fication of  its  local  tariffs,  as  to  whether  they  are  inherently 
reasonable  or  not;  first,  by  comparison  with  the  general  level 
throughout  the  surrounding  territory;  and,  secondly,  as 
yielding  a  return  on  the  capital  actually  invested.  This  seems 
to  have  been  the  line  of  reasoning  which  the  Interstate  Com- 
merce Commission  adopted  in  the  recent  important  Spokane, 
Washington,  cases. ^  The  low  through  rates  to  the  Pacific 
coast  were  established  as  reasonable  by  the  competition  of  sea 
routes  round  the  Horn,  and  especially  by  the  newly-opened 
Tehawntepec  Railroad.  The  only  ground  for  finding  there 
was  discrimination  against  Spokane  was  an  inherent  unreason- 
ableness in  its  rate.  This  was,  in  fact,  the  outcome;  the 
decision  being  rendered  notable,  further,  by  reason  of  the 
prominence  given  to  the  valuation  of  the  railroads'  property 
as  a  basis  of  judgment. 

The  first  important  point  to  be  established,  then,  in  this 
second  variety  of  the  oyster  case  was  as  to  the  relative  distri- 
bution of  traffic  from  the  more  distant  competitive  point  by 
the  several  lines  open  to  it.  The  next  concerned  the  absolute 
reasonableness  of  the  rate  at  the  intermediate  point.  In  the 
third  place,  we  must  inquire  whether  the  rate  at  the  more 
distant  point  may  not  be  unreasonably  low.  This  was  a  con- 
tingency not  possible,  as  we  have  just  seen,  in  the  Spokane 
case.  But  others  may  be  different  in  this  regard.  One  is  thus 
forced  to  consider  the  effect  of  the  presence  of  roundabout  com- 
petitive lines  upon  the  level  of  rates  at  the  more  distant  point. 
An  indirect  rival  road  may,  as  in  the  St.  Cloud  case,  carry  only 
seventy-three  carloads  a  day  as  compared  with  a  daily  move- 
ment of  one  thousand  cars  by  the  direct  lines.  On  the  other 
1  Details  at  pp.  245  and  610,  infra. 


LOCAL  DISCRIMINATION  227 

hand,  as  in  the  Savannah  Freight  Bureau  case,  Valdosta,  Geor- 
gia, may  receive  nine-tenths  of  its  supply  of  fertilizer  by  indirect 
roads.  But  in  any  event  it  is  the  potential,  not  the  actual, 
movement  of  tonnage,  which  may  count  in  the  long  run.  It  is 
indisputable  that  the  short  line  between  two  points  never  pares 
its  rates  down  to  an  irreducible  minimum  except  under  com- 
pulsion. The  presence  of  a  roundabout  route  affords  just  this 
pressure  to  reduction.  Even  allowing  that  in  the  last  analysis 
the  long  line  will  strike  bed-rock  of  no  profit  first,  it  is  indis- 
putable that  such  lines  frequently,  instead  of  merely  meeting 
rates  made  for  them  by  the  direct  routes,  seek  to  divert  business 
by  actually  undercutting  those  rates.  Having  only  a  small 
share  of  the  tonnage,  they  take  risks  which  would  be  fatal  to 
others.  To  transport  at  an  absolute  loss  is  of  course  no  more 
defensible  than  the  argument  of  the  merchant  that  the  only 
way  to  compensate  for  selling  goods  below  cost  was  to  enlarge 
the  volume  of  his  business.  But,  of  course,  there  is  always 
the  chance  that,  by  enlarging  this  volume  sufficiently,  operating 
expenses  may  be  so  far  cut  down  that  a  loss  may  be  transformed 
into  a  profit.  The  diversion  of  enough  traffic  from  the  direct 
railroad  line  to  accomplish  this  end  would,  of  course,  reduce 
the  volume  of  its  traffic  and  thereby  unduly  burden  it,  to  the 
manifest  injury  of  all  local  points  like  X. 

Suggestive  illustrations  of  lower  rates  at  the  more  distant 
point  than  are  under  the  circumstances  actually  "compelled" 
by  competition  of  routes  are  to  be  had.  In  a  recent  case  ^  the 
rates  on  bananas  from  Charleston,  South  Carolina,  to  Danville 
and  Lynchburg,  Virginia,  respectively,  were  called  in  question. 
The  traffic  moved  through  Danville  on  its  way  to  Lynchburg, 
sixty-six  miles  beyond,  at  a  rate  of  forty-three  cents  to  Dan- 
ville as  compared  with  a  rate  of  twenty  cents  to  Lynchburg. 
The  reason  for  the  low  rate  at  Lynchburg  was  the  presence  of 
a  rival  route,  —  bananas,  coming  in  through  Baltimore.  But 
the  lowest  rate  "compelled"  by  this  competition  was  in  fact 
^  Interstate  Commerce  Reports,  No.  696,  decided  June  25,  1904. 


228  RAILROADS 

thirteen  cents  higher  than  the  Danville  line  charged  at  Lynch- 
burg. In  other  words,  the  long-distance  rate  was  that  much 
lower  than  it  need  have  been.  This  instance  is  analogous  in 
another  way  to  our  oyster  case,  inasmuch  as  the  demand  at 
Danville  being  limited,  one-half  of  the  same  carload  paid  the 
Danville  rate  of  forty-three  cents,  while  the  other  half  went  on 
at  the  lower  rate  of  twenty  cents  enjoyed  at  the  more  distant 
point.  It  is  in  this  connection,  of  rates  unduly  low  at  so-called 
competitive  points,  that  the  partial  weakness  in  the  railroad 
arguments  in  many  of  the  southern  basing  point  cases  appears. 
Since  the  Supreme  Court  of  the  United  States  had  held  that 
competition  at  the  more  distant  point  justified  its  lower  rates, 
the  Interstate  Commerce  Commission  was  powerless  to  give 
effect  to  whatever  opinion  it  might  entertain  that  at  times  it  is 
neither  water  nor  commercial  competition  which  actually  brings 
about  the  low  rate  at  the  basing  point;  but  merely  a  consensus 
of  opinion  among  carriers  that  that  place  will  respond  quickly 
enough  to  favors  granted,  to  make  it  worth  while  to  try  the 
experiment.^  This  conviction  is  vastly  strengthened,  of  course, 
since  entire  monopoly  among  all  the  southern  railroad  lines  has 
become  an  established  fact.  It  is  an  absurdity  to  speak  longer 
of  any  competition  between  rail  carriers  existing  in  a  large 
part  of  this  territory.^ 

Actual  illustrations  of  this  second  variant  of  the  oyster 
case,  free  still  from  the  complications  of  competition  of  markets, 
are  not  common,  but  occasionally  arise.  Chattanooga,  which 
aspires  to  be  the  commercial  and  industrial  centre  of  eastern 
Tennessee,  is  about  150  miles  southeast  of  Nashville,  as  showni 
by  the  accompanying  sketch  map.  Owing  to  the  south- 
western trend  of  the  Appalachian  Mountain  valleys,  it  is  only 
846  miles  from  New  York  by  rail,  almost  as  the  crow  flies;  while 
Nashville  has  access  to  the  North  principally  through  Ohio  river 

^  Cf.  the  opinion  in  the  Savannah  FertiUzer  case  in  our  Railway  Prob- 
lems, chap.  Xn. 

^  Chapter  XI,  infra,  also  in  volume  II. 


LOCAL  DISCRIMINATION 


229 


gateways,  over  lines,  at  the  best,  1,058  miles  in  length.  By 
these  lines,  therefore,  the  latter  is  212  miles  further  from  New- 
York  than  Chattanooga.  But  the  two  competitive  places  are 
only  151  miles  apart;  whence  it  follows  that  the  shortest  pos- 
sible all-rail  line  from  New  York  to  Nashville,  swings  around  to 
the  south  by  way  of  Chattanooga.    The  situation  is  complicated 


by  other  combined  rail  and  water  routes  from  New  York  through 
Norfolk,  Savannah,  and  Charleston.  But  all  these  lines  also 
reach  Nashville  by  coming  up  through  Chattanooga.  From 
every  point  of  view,  therefore,  Chattanooga,  on  the  basis  of 
mileage,  is  the  nearer  point  to  New  York  —  151  miles  nearer  by 
the  direct  line,  all  rail ;  equally  nearer  by  all  combined  rail  and 
water  routes:  and  212  miles  nearer  than  is  Nashville  by  the 
roundabout  all-rail  lines  through  Louisville  or  Cincinnati.  Its 
location  corresponds  to  X  in  our  second  variation  of  the  oyster 
case;    namely,  an  intermediate  point  on  the  direct  line  to 


230 


RAILROADS 


another  more  distant  point  Y,  which  latter  enjoys  the  compe- 
tition of  more  roundabout  routes. 

The  disability  against  Chattanooga,  against  which  it  pro- 
tested, was  substantial.^  Its  first-class  rate  from  New  York 
was  $1.14  per  hundred  pounds,  while  Nashville  paid  only  nine- 
ty-one cents.  On  various  commodities  the  Chattanooga  rates 
were  from  twenty-five  to  seventy-five  per  cent,  above  those  to 
Nashville.     The  effect  of  such  differences  upon  jobbing  business 


PI^TAWCE.    FROM    /fASKVILLEL-Mll-EL^ 
I  I  I  I  I  I 


wmw  .wvmvw  tmmw 


at  the  places  intermediate  between  Nashville  and  Chattanooga 
is  shown  by  the  subjoined  chart.  The  two  upper  sloping  lines 
represent  the  through  rates  from  New  York  to  each  distributing 
centre,  plus  the  local  rates  out  to  way  stations.  Even  at 
Bolivar,  the  nearest  place  to  Chattanooga,  the  Nashville  combi- 
nation is  slightly  lower  than  that  based  upon  Chattanooga. 
This  disability  steadily  increases  as  Nashville  is  approached, 
rates  from  Chattanooga  rising  while  those  from  Nashville  fall, 
until  at  Kimbro  the  jobber  located  at  Chattanooga  —  the 
nearer  point  to  New  York  on  the  direct  line  —  must  lay  down 
his  New  York  goods  at  a  rate  of  sixty-three  cents  a  hundred 

1  10  Int.  Com.  Rep.,  Ill;   reprinted  in  full  in  our  Railway  Problems, 
chap.  X.     Also  the  Commerce  Court  decision  in  chap.  XVI,  infra. 


LOCAL  DISCRIMINATION  231 

pounds  higher  than  his  competitor  in  Nashville  enjoys.  This 
adjustment  is  partly  an  historical  product.  Nashville,  by  the 
old  river  routes  from  Pittsburg  down  the  Ohio  and  up  the 
Cumberland,  was  formerly  nearer  the  Eastern  cities  than  Chat- 
tanooga. Then,  the  trunk  lines  through  Cincinnati  with 
heavy  traffic  and  low  rates  shortened  the  distance ;  and,  finally, 
the  Louisi-ille  &  Nashville  Railroad,  supplanting  the  river 
routes,  undertook  to  build  up  Nashville  as  against  Cincinnati 
and  Louis\'ille.  Historically,  on  the  other  hand,  Chattanooga 
was  long  an  unimportant  point.  It  took,  as  it  still  does,  the 
same  rate  from  the  North  as  prevailed  at  some  twenty-three 
other  southern  cities  from  Atlanta  to  Memphis.  Here  is  the 
crux  of  the  difficulty.  The  rates  at  Nashville  must  be  assumed 
as  historically  fixed.  Wliatever  remedy  may  apply  must  come 
from  a  reduction  of  the  rates  to  Chattanooga,  the  nearer  point. 
This  place  has  now  become  an  important  centre,  the  meeting 
point  of  a  number  of  rail  and  water  lines.  The  long  prevalent 
grouping  of  all  the  southern  cities  with  equal  rates  from  the 
North  must  be  replaced  by  a  system  of  chfferentials,  if  the 
discrimination  against  Chattanooga  is  ever  to  be  ameliorated. 
By  this  time  it  will  be  observed  that  in  the  discussion  of  the 
Chattanooga  case  we  have  drifted  far  beyond  the  mere  compe- 
tition of  rival  routes.  Commercial  competition,  which  affords 
the  justification  for  grouping  all  these  twenty-three  important 
southern  cities  together,  is  a  topic  to  be  treated  elsewhere  by 
itself.  The  difficulty  in  many  of  these  cases  is  to  distinguish 
between  the  really  strongest  line  and  the  one  which  is  merely 
the  shortest.  Upon  this  point  one's  decision  of  the  Chatta- 
nooga case  might  actualty  depend.  The  Louisville  &  Nash- 
ville contends  that  Nash\dlle  even  today  is,  from  an  operating 
point  of  view,  nearer  New  York  than  Chattanooga,  although 
the  distance  is  212  miles  more.  All  the  trunk  lines  compete 
at  Ohio  river  points,  and  bring  them  relatively  much  closer  to 
New  York.  The  density  of  traffic  on  these  lines  is  far  heavier 
than  on  the  air  line  to  Chattanooga. 


232  RAILROADS 

It  happens  that  Chattanooga  meets  this  allegation  of  greater 
trunk  line  density  and  cheapness  by  proof  of  the  still  greater 
economy  of  operation  by  the  coastwise  steamers  to  southern 
ports,  traffic  coming  thence  north  by  rail  through  Chattanooga. 
The  appearance  of  water  competition  in  any  of  these  cases 
always  introduces  an  almost  insuperable  difficulty  in  the  way  of 
comparison  of  long  and  short  lines.  Shipment  by  vessel  differs 
from  rail  carriage,  primarily  in  the  relatively  high  terminal  costs, 
the  absence  of  all  maintenance  of  way  costs,  and  the  low  cost 
of  actual  propulsion.  With  a  cargo  once  securely  stowed,  the 
distance  traversed  by  a  vessel  is  of  relatively  little  importance, 
much  less  so  than  in  the  case  of  carriage  by  rail.  A  powerful 
factor  in  determining  water  rates,  moreover,  especially  by  sea, 
is  the  absence  of  local  traffic.  Wharves  and  terminals  being 
expensive  to  build  and  maintain,  and  the  method  of  loading  in  a 
ship's  hold  not  being  conducive  to  ease  in  access  or  assortment, 
vessels  are  confined  largely  to  bulk  traffic  at  a  few  important 
points.  The  expenses  of  operation  must  be  more  uniformly 
distributed  over  the  cargo  than  in  the  case  of  a  trainload.  The 
water  fine,  therefore,  is  deprived  of  one  advantage  in  cutting 
rates.  It  cannot,  so  readily  as  a  railroad,  recoup  itself  for 
losses  on  competitive  business  or  at  competitive  points  by  falling 
back  upon  its  earnings  from  way  stations. 

From  all  these  considerations  it  not  infrequently  comes 
about  that,  unlike  carriage  by  rail,  the  longest  way  round 
may  indeed  be  the  shortest  way  home.  This  is  clear  in  the 
highly  involved  Wichita,  Kansas,  cases. ^  Wichita,  a  com- 
mercial centre  of  southern  Kansas,  is  200  odd  miles  south-west 
of  Kansas  City.  Its  all-rail  rates  from  the  East  are  higher 
than  to  Kansas  City.  Yet  by  the  water  route  from  New 
York  to  Galveston  and  thence  up  by  rail,  as  compared  with 


1  The  leading  Wichita  cases  are  as  follows:  9  I.C.C.  Rep.,  507,  534  and 
558.  —  10  Idem,  460.  (Lehmann  Higginson  Co.).  —  13  Idem,  389.  Also 
189  U.  S.  Rep.,  274.— Also  Senate  (Elkins)  Committee,  1905,  IV. 
p.  2874  et  seq. 


LOCAL  DISCRIMINATION  233 

Kansas  City,  it  is  a  nearer  and  intermediate  point.  The 
Interstate  Commerce  Commission  well  expresses  the  difficulty: 

"It  is  quite  probable  tlxat  the  actual  cost  of  transporting  cotton 
piece  goods  from  New  York  to  Wichita  via  Galveston  does  not  exceed 
that  of  carrA-ing  them  from  New  York  to  Kansas  City  via  the  cheapest 
route.  The  aU-rail  haul  is  to  the  latter  point  1,300  miles  and  over. 
The  ocean  and  rail  movement  involves  a  rail  carriage  of  from  1,100 
to  1,300  miles,  depending  upon  the  route  selected.  If  the  goods  move 
through  some  Gulf  port,  there  is  a  rail  carriage  of  not  less  than  850 
miles.  If,  therefore,  the  rate  were  to  be  measured  by  the  expense  of 
the  service,  it  is  probable  that  Wichita  would  today  enjoy  as  low  a 
rate  as  the  Missouri  river." 

The  Wichita  complication,  moreover,  works  both  ways. 
Wichita  and  Kansas  City  form  two  angles  of  a  narrow  triangle 
with  its  apex  at  the  Gulf  ports;  but  the  distance  from  Kansas 
City  is  longer  than  from  Wichita.  Railroad  competition 
brought  it  about,  however,  that  the  rate  on  export  grain  from 
Wichita  via  Kansas  City  to  the  Gulf  came  to  equal  the  rate 
from  Kansas  City  to  the  Gulf  via  Wichita.  But  the  former 
was  a  much  longer  and  more  roundabout  haul;  and,  moreover, 
w^as  less  than  the  shorter  haul  rate  from  Wichita  to  the  Gulf 
direct.  The  analogy  to  the  Hillsdale  case,  above-described, 
will  appear  clearly  on  inspection  of  the  map. 

Summarizing  the  results  so  far  reached,  in  all  that  concerns 
the  two  sorts  of  cases  considered  in  the  preceding  paragraphs, 
our  conclusion  is  that,  when  competition  by  rail  at  the  distant 
point  is  alone  present,  and  when  the  nearer  point  is  on  a  round- 
about route,  a  railway  ''is  entitled  to  carry  the  traffic  past  X 
to  Y  (Philadelphia)  for  considerably  less  than  nothing";  but, 
when  the  nearer  point  is  on  a  direct  line,  the  case  is  debatable. 
Proof  that  normal  competition  compels  the  lower  rate  at  the 
remoter  station  must  be  uncommonly  clear  and  conclusive. 
In  other  words,  the  facts  that  the  rate  at  Y  is  not  unduly  low 
and  also  that  the  rate  at  X  is  not  unreasonably  high  must 
both  be  firmly  established. 

A  distinct  class  of  cases  of  local  discrimination  is  suggested 


234  RAILROADS 

by  the  recent  case  of  Montgomery,  Ala.,  in  the  United  States 
Commerce  Court. ^  These  like  other  cross  line  cases,  akin  to 
that  of  Wichita,  Kansas,  above-mentioned,  arise  in  connection 
with  practices  as  to  the  division  of  joint  rates.  They  will  be 
discussed  in  connection  with  pro-rating  in  our  second  volume. 
The  question  has  forced  itself  forward  constantly  as  to 
whether  the  existence  of  the  alleged  discrimination  in  rates 
is  merely  a  matter  of  relativity  in  cost  of  operation  or  whether 
it  inflicts  positive  injury  upon  the  nearer  point.  Would  it 
benefit  the  nearer  point  if  the  lower  rate  beyond  were  with- 
drawn? It  is  here  that  the  complexity  of  some  of  these  cases 
of  local  discrimination  becomes  apparent.  To  understand  this 
phase  of  the  matter,  the  factor  of  commercial  competition,  as 
distinct  from  mere  rivalry  of  routes,  must  be  introduced.  Had- 
ley's  analysis  of  the  oyster  case  is  quite  inadequate  on  this 
point.  Rates  in  that  instance  were  on  commodities  (oysters) 
produced  at  practically  uniform  cost  at  both  X  and  Y.  They 
were,  moreover,  rates  from  two  places  out  to  a  common  market. 
Would  it,  however,  make  any  difference  if  the  controversy 
concerned  the  rates  in  the  opposite  direction;  or,  in  other 
words,  from  a  common  centre  of  distribution  out  to  two  com- 
peting consuming  points?  Would  it  make  any  difference 
whether  the  goods  were  to  be  consumed  at  X  and  Y;  or  were 
to  be  used  as  raw  material  in  manufactures  at  those  two  points; 
or  were  to  be  distributed  throughout  the  countryside  from 
X  and  Y  as  jobbing  centres?  It  is  at  once  evident  that  these 
issues  are  more  complicated  than  in  the  first  case.  The  two 
points  X  and  Y  being  commercial  and  industrial  rivals,  is  it 
not  possible  that  the  growth  of  one  may  take  place  at  the 
expense  of  the  other?  At  any  given  time  there  is  only  a  fixed 
demand  for  the  goods  consumed,  manufactured  in  or  redis- 
tributed from  the  two  places.  Trade  won  by  one  is  quite  lost 
to  the  other.  Of  course,  in  a  measure,  this  might  also  have 
been  true  of  the  oyster  production.  But,  inasmuch  as  in  that 
1  Chapter  XVIII,  p.  590,  infra. 


LOCAL  DISCRIMINATION  235 

case  the  rate  from  Y  was  not  affected  by  the  entry  of  X,  its 
prosperity  would  not  probably  be  disturbed.  The  Hillsdale  ice 
case,  above  described,  is  also  one  where  the  commodity  (ice)  is 
of  relative  unimportance  for  Columbus  and  Springfield,  re- 
spectively. How  would  matters  stand  if  the  rates  in  question 
were  on  lumber  or  coal  for  manufacturing  purposes?  The 
difference,  no  doubt,  is  merely  of  degree  and  not  of  kind. 
Magnitudes,  however,  must  not  deceive  us.  The  rights  of 
Kathleen  or  Danville  are  just  as  sacred  as  those  of  Youngstown 
and  Pittsburg. 

St.  Cloud,  Minnesota,  is  located  upon  a  line  of  the  North- 
ern Pacific  Railroad,  seventy-six  miles  northwest  of  St.  Paul.^ 
It  is  a  competitor  not  only  with  St.  Paul,  but  with  other  local 
centres  in  the  vicinity,  like  Elk  River,  Princeton,  and  Anoka, 
either  for  flour  milling  or  for  distributive  jobbing  business. 
It  is  about  the  same  distance  as  these  other  places  from  Duluth 
or  Superior;  through  which  the  entire  district  obtains  its 
supplies,  such  as  coal  from  the  East  by  lake  boats;  and  by 
way  of  which  its  flour  must  be  shipped  to  the  Eastern  markets 
and  to  Europe.  And  yet  the  rate  on  flour  made  at  St.  Cloud 
to  New  York  in  1899  was  twenty-eight  and  a  half  cents  per 
hundredweight,  as  against  a  rate  of  twenty-one  and  a  half  cents 
from  St.  Paul,  this  latter  rate  being  enjoyed  also  by  Milaca, 
Princeton,  Elk  River,  and  Anoka.  The  rates  on  coal  and 
other  supplies  from  the  East  were  likewise  proportionately 
higher  than  to  St.  Paul  and  these  neighboring  towns.  The 
specific  complaint  in  this  case  is  of  local  discrimination.  The 
Northern  Pacific  Railroad  operates  the  long  line  between  St. 
Paul  and  the  head  of  Lake  Superior  by  way  of  Brainerd.  On 
this  business,  passing  through  St.  Cloud,  it  has  to  meet  a  rate 
compelled  at  St.  Paul  by  the  competition  of  no  less  than  three 
direct  lines  to  Duluth.  It  avers  that  this  business,  taken  either 
way  for  longer  distances  and  at  lower  rates  than  are  accorded 

'8  Int.  Com.  Rep.,  346:  reprinted  in  full  in  our  Railway  Problems, 
chap.  XI. 


236 


RAILROADS 


to  St.  Cloud,  in  no  way  affects  the  rates  at  that  point;  and 
that  whatever  it  can  earn  as  a  contribution  to  joint  expenses 
decreases  the  burden  of  these  upon  St.  Cloud  rates.  This  is 
all  entirely  true  from  the  transportation  point  of  view;    but, 


viewed  in  a  large  way,  the  situation  is  altered.  Wheat  of  local 
production  about  St.  Cloud  is  rendered  of  less  value  by  practi- 
cally the  excess  of  the  St.  Cloud  rate  per  hundredweight  over 
the  rate  enjoyed  from  St.  Paul.  The  Interstate  Conmierce 
Commission  found  that  this  was  equivalent  to  a  cUfference  of 
fully  $1  per  acre  in  the  value  of  wheat  lands  tributary  to  St. 


LOCAL  DISCRIMINATION  237 

Cloud.  And  on  the  other  hand,  of  course,  the  cost  of  all  its 
supplies  is  enhanced  above  the  level  of  rival  manufacturing 
centres.  On  soft  coal  this  equalled  no  less  than  eighty-five 
cents  per  ton.  To  this  the  Northern  Pacific  replied  that  the 
discrimination  against  St.  Cloud  was  not  of  its  creation,  but 
had  existed  before  its  entry  into  any  St.  Paul  business  by 
its  indirect  route.  The  Commission  found,  however,  that 
in  fact  the  participation  of  this  indirect  line  on  St.  Paul-Duluth 
business  did  affect  the  short-line  rate;  and  that  its  withdrawal 
would  at  least  tend  to  prevent  any  further  reduction  of  the 
St.  Paul  and  related  rates.  If  the  withdrawal  did  not  remove 
the  discrimination  against  St  Cloud  it  would  not  at  all  events 
aggravate  it.  The  vital  point,  differentiating  this  case  from 
that  of  the  Savannah  Freight  Bureau,  previously  stated,  was 
the  actual  damage  to  the  intermediate  point  due  to  the  exist- 
ence of  commercial  competition  between  it  and  the  place  more 
distant. 

An  important  feature  in  commercial  competition  is  its 
entire  dissociation  from  all  considerations  of  cost  of  service 
by  long  or  short  routes.  Neither  strong  nor  weak  lines  make 
the  rate.  The  business  is  there.  Market  concUtions  are 
fixed.  The  carriers  are  free  to  take  traffic  or  leave  it.  Single- 
handed,  at  least  they  cannot  rule  the  price  of  transportation. 
The  price  of  sugar  at  Kansas  City  is  made  by  competition  of 
Louisiana  sugar  coming  from  New  Orleans,  of  beet  sugar  and 
Hawaiian  sugar  from  Colorado  and  San  Francisco,  and  of  the 
world's  sugar  from  New  York.  This  is  why  Kansas  City,  in 
the  complaint  stated  in  the  opening  paragraph,  enjoys  a  lower 
rate  on  sugar  from  San  Francisco  than  the  transcontinental 
lines  can  accord  to  Denver.  The  only  possible  justification  for 
the  apparent  anomaly  in  lumber  rates  from  Texas  points,\  cited 
in  the  same  paragraph,  is  that,  as  the  heart  of  the  Middle  West 
is  approached,  lumber  supplies  from  every  point  of  the  compass 
converge  upon  common  markets.  As  is  so  frequently  averred 
in  such  cases,  no  carrier  makes  the  rate.     The  rate  is  made  for 


238  RAILROADS 

all  of  them  by  conditions  beyond  their  control.  The  only 
rates,  therefore,  which  it  is  in  their  power  to  fix  in  some  accord- 
ance with  average  costs  of  operation,  are  the  rates  at  local 
stations.  For  these  rates  alone  can  they  be  brought  to 
book. 

Just  here  another  characteristic  of  commercial  compe- 
tition as  distinct  from  rivalry  of  routes  is  to  be  noted.  Local 
discrimination,  wherever  it  is  alleged  to  occur,  frequently 
assumes  the  form  of  complaint  against  rates  to  various  places, 
not  on  the  same  line  but  by  different  and  often  widely  separated 
lines.  Complaints  of  this  class  might  arise,  for  instance, 
referring  back  to  our  diagrams  of  the  oyster  cases,  between 
X  and  Z.  Philadelphia,  we  will  assume,  as  before,  to  be  the 
common  market.  A  multitude  of  different  varieties  of  protest 
are  distinguishable.  Point  X  equally  distant  from  Philadelphia 
with  Z  may  pay  a  higher  rate  than  Z.  Or  X  may  be  less  distant 
than  Z,  and  yet  be  called  upon  to  pay  the  same  rate.  It  may 
even  be  less  distant  than  Z  and  yet  actually  be  charged  a  higher 
rate  than  Z.  But  in  all  these  instances  the  two  points  (X  and 
Z)  are  not  on  the  same  route,  but  on  divergent  routes.  The 
issue  remains  the  same.  The  conditions  imposed  at  the  point 
of  convergence  being  fixed,  each  line  must  exercise  its  own 
ingenuity  in  conforming  thereto.  Methods  in  each  case  must 
differ,  according  to  the  length  of  line,  the  direction  and  com- 
position of  the  traffic,  and  other  factors. 

Three  general  schemes  of  rate-making  are  distinguish- 
able in  American  practice.  The  most  satisfactory  one  is  that 
which  obtains  in  trunk  line  territory,  of  zone  tariffs  with  a 
gradation  in  some  degree  corresponding  to  distance.^  At 
the  other  extreme  is  the  system  of  the  flat  or  postage-stamp 
rate,  exemplified  in  the  Missouri-Mississippi  river  territory,^ 
and  in  Pacific  coast  rates  from  all  points  east  of  the  Mississippi.^ 

1  Chapter  X,  infra.  ^  Chapter  IV,  supra,  p.  128. 

^  Chapters  XI  and  XIX,  infra. 


LOCAL  DISCRIMINATION  239 

Intermediate  between  the  two  are  the  systems  of  basing  Unes 
and  basing  points.  The  first  of  these,  the  basing  line  system, 
prevails  throughout  the  country  west  of  the  Missouri  river. 
The  second,  the  basing  point  system,  is  found  throughout  the 
southern  states  east  of  the  Mississippi.  In  both  the  principle 
is  the  same.  The  two  differ  only  in  detail.  Through  rates 
are  made  to  certain  designated  places;  and  from  there  on,  a 
local  rate  to  all  other  places,  large  or  small,  is  added.  This 
local  charge  rises,  of  course,  with  distance.  Thus  the  first-class 
rate  to  Denver,  Colorado,  is  made  up  of  a  rate  of  eighty  cents 
from  Chicago  to  the  IVIissouri  river,  plus  $1.25  for  the  balance 
of  the  haul.  From  Chicago  to  a  point  in  central  Nebraska 
the  only  difference  would  be  a  lower  local.  In  southern 
territory  the  rate  to  Troy,  Alabama,  equals  the  sum  of  the 
through  rate  to  the  nearest  basing  point,  Montgomery,  and 
of  the  local  rate  from  there  on  to  destination.  The  only 
difference  in  detail  between  these  two  systems  is  that  in  the 
western  territory,  all  competing  Imes  being  parallel  (until 
the  routes  around  by  sea  and  back  from  the  Pacific  coast  are 
met),  rates  rise  in  all  cases  progressively  with  chstance.  The 
complaint  of  local  discrimination  rests  merely  on  the  allegation 
that  the  rate  of  progression  with  increasing  distance  is  too  rapid. 
In  the  South,  on  the  other  hand,  owing  to  the  encircling  sea- 
coast  with  deeply  penetrating  navigable  rivers,  the  competing 
routes  from  the  East  or  North  converge  from  different  and  even 
from  directly  opposite  directions.  Hence  it  is  impossible  to 
base  rates  upon  extended  boundary  lines,  like  the  Missouri 
river.  Rates  must  be  based  upon  certain  designated  points. 
This  introduces  a  serious  complication.  Points,  instead  of 
lines,  being  used  for  basing  purposes,  in  the  South,  local  rates 
rise  outward  in  every  direction  around  each  basing  centre  until 
the  sphere  of  the  next  basing  point  is  met.  And  local  rates  to 
points  even  back  on  the  same  line,  through  which  the  traffic 
has  already  passed  to  reach  the  basing  point,  are  thus  of  neces- 
sity higher  than  rates  to  points  beyond. 


240 


RAILROADS 


The  economic  anomaly  of  rates  actually  falling  progres- 
sively as  the  length  of  the  haul  increases  is  graphically  well 
illustrated  in  the  accompanying  diagram,  based  upon  data  in 
the  Georgia  Railroad  Commission  cases. ^     The  charges  from 


0C!//C1W//'ATJ 


-ALL  Rail  ratEvS 

FIRS7    CLASS    FROM 

Ci//Cl>vy^ATJ 


.76DCHATTA/V00qA 


.;.08  OMOXTQOMtRY 


Cincinnati  to  local  points  on  all  lines  converging  upon  Atlanta 
equal  the  sum  of  the  rates  to  Atlanta  plus  the  local  charges  out. 
This  holds  good  even  on  the  direct  line  from  Cincinnati  through 
Chattanooga,  as  the  diagram  shows;  yet  of  course  it  also  follows 
that  rates  must  again  decline  as  the  next  basing  point  is  ap- 
proached in  any  direction;  be  it  Montgomery  to  the  west, 
1  5  I.C.C.  Rep.,  324;  p.  480,  infra. 


LOCAL  DISCRIMINATION  241 

Macon  to  the  south,  or  even  Chattanooga  to  the  north.  The 
only  condition  analogous  to  this  in  the  Far  West  appears  in 
those  places  whose  rates  are  made  up  by  a  combination  of 
the  low  water  rates  to  the  coast  plus  a  local  back  eastward 
into  the  mountains.  The  transition  from  this  Pacific  coast 
combination  to  the  system  based  upon  the  Missouri  river 
occurs  at  those  places  where  the  aggregate  charges  from  either 
direction  become  equal.  Viewed  as  a  large  matter  of  principle 
the  whole  western  system  is  analogous  to  the  southern  system. 
It  is  inevitable  in  both  that  intermediate  points  should  in  all 
cases  be  assessed  at  a  higher  rate  than  those  adopted  as  bases.^ 
The  reason  advanced  in  support  of  these  basing  point 
or  basing  line  systems  is  that  they  are  an  outgrowth  of  com- 
mercial competition;  in  other  words,  that  they  are  compelled 
by  conditions  beyond  the  carriers'  control.  Sometimes  it  may 
be  the  competition  of  widely  encirchng  water  routes  —  as  from 
New  York  around  to  Galveston  and  up  to  Kansas  City  in 
the  southwestern  field,  or  to  Mobile  and  up  to  Montgomery, 
Alabama,  in  the  southeastern  states.  But,  in  many  other 
cases,  market  competition  from  other  centres  of  supply  set  the 
limit  to  the  rate  at  the  basing  point.  Missouri  river  cities 
enjoy  a  great  advantage  over  all  competitors,  as  meeting  places 
of  the  ways.  Generally,  the  low  rates  to  the  base  points  have 
been  originally  accorded  in  order  to  build  up  local  distributive 
or  industrial  centres  in  the  face  of  competition  from  older 
places.  Nashville  undoubtedly  owes  a  large  measure  of  its 
present  prominence  to  the  fact  that  in  the  old  days  its  principal 
railroad  gave  a  foothold  and  made  a  clientage  for  its  merchants 
as  against  older  rivals  in  Cincimiati  and  Louisville.  Nor  can 
it  be  said  that  this  was  an  injury  to  that  clientage,  composed  of 
consumers  all  through  the  adjacent  countryside.  Rates  for 
these  consumers  were  not  put  up,  in  order  to  build  up  Nash- 

^  Cf.  Commissioner  Fifer's  dissenting  opinion  in  the  St.  Louis  Business 
Men's  League  case,  9  Int.  Com.  Rep.,  318;  reprinted  in  our  Railway 
Problems,  chap.  XVII. 

VOL.  I — 16 


242  RAILROADS 

ville.  On  the  contrary,  Nashville  was  given  perhaps  inordi- 
nately low  rates,  in  order  that  the  sum  of  these  low  rates  and  of 
the  local  rates  out  to  Four  Corners  should  be  at  least  as  low  as 
those  from  Cincinnati  and  Louisville  direct.  This  last  argu- 
ment is  the  main  economic  defence  of  the  southern  basing 
point  system.^  It  applies  equally  to  the  advocacy  of  a  low 
basing  line  at  Missouri  river  cities  for  rate  making  to  points 
beyond.  2 

The  main  difficulty  with  any  system  of  basing  points  or 
lines,  which  so  flagrantly  violates  the  distance  principle,  is 
first  of  all  to  determine  at  what  points  to  base;  and  thereafter 
to  accommodate  the  system  to  the  normal  growth  and  de- 
velopment of  the  country.  The  system  is  inelastic.  It  tends 
to  break  down  of  its  own  weight.  It  must  enlarge,  if  at  all, 
by  fits  and  starts,  in  each  case  with  violent  dislocation  of  trade. 
A  generation  ago  towns  in  Iowa  complained  that  the  Mississippi 
river  was  a  basing  line.  Then,  when  the  Missouri  river  line 
was  substituted,  an  outcry  rose  from  all  the  points  in  Nebraska. 
The  persistent  complaint  from  Denver  against  its  rate  ad- 
justment as  compared  with  Kansas  City,  —  a  competitive 
distributing  centre,  —  well  exemplifies  it.  The  Denver  Cham- 
ber of  Commerce  intervenes,  and  proposes  that  the  basing  line 
be  moved  from  the  Missouri  river  out  to  Colorado  common 
points  (like  Denver).  Indeed,  in  each  case  the  argument  in 
favor  of  the  change  is  identical.  Each  tier  of  complainants  — 
thriving  cities  which  have  recently  come  to  more  or  less  com- 
mercial maturity  —  plead  their  inability  to  compete  with  the 
centres  adopted  some  years  ago  for  basing  purposes.  Denver, 
for  example,  wishes  to  sell  goods  throughout  Utah.  But  its 
total  charges  there  on  goods  purchased  in  the  East  amount 
to  eighty  cents  from  Chicago  to  the  Missouri  river,  plus 
$L25  on  to  Denver,  plus  $L64  on  to  destination,  — a  sum  of 

'  Chapter  XI,  infra. 

2  11  I.C.C.  Rep.,  495;  15  Idem,  555;  U.  S.  Industrial  Commission,  IV, 
p.  264  and  IX,  p.  287.     Also  pp.  129,  supra,  and  442,  infra. 


LOCAL  DISCRIMINATION  243 

$3.69  per  hundred  pounds.  The  Kansas  City  dealer,  on  the 
other  hand,  gets  a  low  base  rate  of  only  eighty  cents  with  a 
single  additional  rate  directly  out  to  Utah  of  $2.05.  In  other 
words,  the  latter  can  lay  down  his  goods  in  Utah  for  $2.85  as 
against  $3.69  paid  by  the  Denver  competitor.  The  point  to 
be  carried  forward,  however,  is  not  so  much  the  disparity 
against  Denver,  as  the  fact  that  the  moment  Denver  is  promoted 
to  be  a  basing  point  it  becomes  defendant  in  a  complaint  of 
precisely  the  same  sort,  brought  by  the  places  still  further 
west.  This  inelasticity  of  basing  point  schemes,  together 
with  their  inability  to  expand  without  abrupt  dislocations  of 
trade,  is  apparent  everywhere  in  the  South.  Just  as  Chatta- 
nooga complains  against  Nashville,  so  the  little  intermediate 
stations  between  Chattanooga  and  Atlanta,  as  our  diagram  on 
page  240  showed,  become  restive  under  rates  of  $1.27  as  com- 
pared with  a  rate  twenty-one  cents  lower  charged  on  to  Atlanta. 
The  system  of  basing  points  or  Hues  may  be  an  inevitable 
concomitant  of  industrial  immaturity;  but  it  is  none  the  less 
difficult  to  defend  as  a  permanent  system  or  as  one  inherently 
just.  And  its  final  relegation  to  the  scrap  heap,  in  favor  of  a 
system  of  rates  graded  more  or  less  according  to  distance,  is 
ardently  to  be  desired."^ 

Does  a  constant  rate  applied  over  a  long  stretch  on  the 
same  line  constitute  local  discrimination?  May  the  nearer 
points  rightfully  protest  against  the  fact  that  equally  low 
rates  are  accorded  to  remoter  points?  This  is  the  gist  of  the 
controversy  in  the  very  suggestive  Milk  Rate  cases  in  1897.^ 
Here  the  conflict  of  interest  between  producer  and  consumer 

1  The  feasibility  of  doing  this  in  the  South  could  all  parties  concerned 
be  whipped  into  line,  is  demonstrated  by  the  ingenious  adaptation  of  the 
trunk  line  system  to  local  conditions  by  a  special  committee  of  the 
Southern  Railway  and  Steamship  Association  in  1880.  Report  of  meeting 
August  12,  1880,  in  Proceedings,  VII. 

2  7  I.C.C.  Rep.,  92.  The  report  and  opinion  is  reprinted  in  full  by  the 
Senate  (Elkins)  Committee,  1905,  as  Appendix  H. 


244  RAILROADS 

is  obvious.  The  city  of  New  York  naturally  desires  a  wide 
market  from  which  to  draw  its  supply.  On  the  other  hand, 
the  near-by  producers  wish  to  enjoy  the  advantages  of  nearness 
to  the  market  to  the  fullest  degree.  Study  of  the  evolution  of 
rate  sheets  clearly  shows  how  such  grouping  of  charges  over 
long  distances  may  be  in  the  nature  of  a  compromise  to  avoid 
actual  violation  of  the  long  and  short  haul  principle.  Often- 
times places  scattered  along  over  a  hundred  miles  of  railroad 
enjoy  absolute  equality  of  charges.  Obviously,  the  ton-mile 
rate  steadily  falls  within  such  a  group  with  progressive  remote- 
ness. Yet  it  is  an  inevitable  feature  of  tariff  building.^  It  is 
the  kernel  of  the  admirable  trunk  line  rate  system.  Such  an 
equalization  of  rates  between  points  unequally  distant  from 
a  given  centre,  not  infrequently  arises  in  connection  with 
mere  competition  of  transportation  routes.  Referring  back 
to  the  diagrams  on  page  219,  it  may  happen  that  a  complainant 
at  X,  the  nearer  point,  recognizing  the  inevitableness  of  a  low 
rate  at  Y,  may  succeed  in  securing  an  agreement  that,  while  its 
charges  cannot  be  less  than  at  Y,  at  least  they  shall  not  be  more. 
This  was  all  that  was  asked  in  the  "rare  and  peculiar"  case  of 
Youngstown,  Ohio.^  But  it  is  apparent  that  such  a  solution 
differs  only  in  degree  from  those  previously  discussed.  The 
question  of  principle  remains  the  same.  The  roundabout 
route  to  New  York  up  back  by  way  of  Youngstown  could 
continue  to  compete  at  Pittsburg  for  as  low  a  rate  as  on  direct 
shipments,  even  if  it  observed  the  long  and  short  haul  principle 
to  which  the  Pennsylvania  direct  route  was  committed,  only 
by  charging  much  lower  rates  per  ton  mile  on  Pittsburg  traffic 
through  Youngstown  than  was  levied  on  business  there  originat- 
ing. This  raises  precisely  the  same  question  of  distribution 
of  joint  expenses  between  local  and  competitive  traffic,  already 
discussed.  In  certain  contingencies  under  the  second  variety 
of  the  oyster  cases,  such  a  solution  might  apply.  Would 
Chattanooga,  for  example,  assuming  it  to  belong  in  the  second 
1  P.  103,  supra.  ^  Pp.  223,  supra;  and  296,  infra. 


LOCAL  DISCRIMINATION  245 

class  of  oyster  cases,  be  contented  with  an  equality  of  through 
rates  with  Nashville,  leaving  its  local  rates  out  to  smaller  towns 
as  they  are? 

The  most  extreme  instance  of  uniform  or  postage-stamp 
rates  applied  over  long  distances  occurs  in  the  transconti- 
nental tariffs  from  different  points  in  the  East.     These  differ 
radically  from  the  adjustment  of  rates  between  different  points 
on  the  Pacific  slope,  already  described.     At  the  far  western 
end  the  lowest  rates  are  accorded  to  coast  cities,  because  of 
water  competition  by  sea.     Rates,  to  interior  points  progi'es- 
sively  rise  by  the  addition  of  locals  inward  toward  the  interior. 
The  rates  thus  compelled  by  water  competition  are  accepted 
by  the  all-rail  lines.     Thus  the  Pacific  coast  end  is  practically 
built  upon  a  basing  line.     It  might  be  expected  that  in  conse- 
quence of  water  competition  by  sea  a  similar  system  would 
prevail  at  the  eastern  end  of  the  line;  that  rates  to  the  Pacific 
coast  from  interior  cities  would  rise  progressively  according  to 
distance  inland,  until  at  all  events  the  direct  all-rail  charge 
became  as  low  as  by  the  combined  rail-and-water  rates.     But 
such  is  not  the  case,  and  for  two  reasons.     The  first  is  that  in 
the  East  interior  cities  are  large  and  powerful  factors  in  trade. 
There  were  no  such  interior  cities  in  the  Far  West,  until  Spokane 
came  into  its  own.     These  inland  eastern  cities,  Pittsburg,  for 
example,  demanded  equality  of  opportunity  with  the  seaboard 
cities  in  Pacific  coast  trade.     They  succeeded  in  obtaining  it  by 
a  grant  of  as  low  rates  as  New  York  or  Boston  enjoyed.     In 
the  second  place,  all  the  Pacific  coast  carriers  enjoy  monopoly 
as  far  east  as  the  Missouri  river.     But  east  of  that  line  there 
are  many  routes  interested  in  middle  western  cities,  but  having 
no  interest  in  those  in  the  East.     They,  too,  have  insisted  upon 
giving  their  clients  in  such  places  as  St.  Louis  and  Chicago  as 
low  rates  as  Philadelphia  or  New  York.     Little  by  little  the 
equality  of   rates  was    extended    until   for    many  years   the 
blanket   rate  has  covered   the   entire   United   States  east  of 
the  Mississippi  river. 


246  RAILROADS 

Does  not  this  constitute  local  discrimination  against  the 
middle  western  cities?  This  was  one  of  the  main  conten- 
tions in  the  St.  Louis  Business  Mens'  League  case.  Being 
one  thousand  miles  nearer  San  Francisco,  it  demanded  recogni- 
tion of  that  fact  in  its  tariffs.  The  difficulty  is  accentuated 
when  both  eastern  and  western  point  rates  are  considered 
together.  St.  Louis  enjoys  no  lower  rate  than  New  York, 
although  one  thousand  miles  further  east;  and  inland  points 
in  the  Rocky  mountain  area  may  be  one  thousand  miles  further 
east  than  San  Francisco  and  yet  pay  a  higher  rate.  Thus  it  is 
possible  to  lop  off  one  thousand  miles  at  each  end  of  the  line 
without  affording  any  recognition  of  it  in  the  tariffs.  The 
situation  is  too  involved  to  discuss  in  detail  in  this  place;  but 
one  finds  it  difficult  to  avoid  the  conclusion  that  the  whole 
system  w^U  demand  revision  before  long.  Geographical  condi- 
tions are  immutable.  Trade  conditions  are  not.  Perhaps 
it  was  inevitable  that  the  former  should  by  force  of  circum- 
stances have  been  somewhat  overlooked  during  a  period  of 
rapid  growth.  But,  as  commercial  affairs  approach  a  condi- 
tion of  stability  and  permanence,  the  matter  will  call  for  most 
careful  examination. 

Constant  rates  applied  over  long  distances  on  the  same 
line  almost  inevitably  tend  to  pass  over  into  a  system  of  equality 
of  rates  over  different  lines.^  The  necessity  was  evident  enough 
in  the  Milk  Rate  case.  This  phase  of  the  matter  may  theoreti- 
call}^  best  be  discussed  by  reference  to  the  following  diagram. 
Suppose  A,  B,  C,  and  D  to  represent  any  four  inland  "common 
points."  It  remains  to  show  how  it  comes  about  that  they  all 
finally  enjoy  equal  rates  to  all  four  seaports,  regardless  of  loca- 
tion. Each  appears  to  be  naturally  tributary  to  some  one  of 
the  seaports  by  a  dominant  or  short-line  route.     In  each  in- 

1  Similar  cases  are  12  I.C.C.  Rep.,  564;  14  Idem,  476  on  oranges;  16 
Idem,  276;  22  Idem,  93  and  115;  and  23  Idem,  195;  are  local  but  identical 
problems  of  distances.  Also  the  Superior  Commercial  Club  case,  just 
handed  down  June  25,  1912,  on  grain  rates.  Cf.  also  Hammond,  Railway 
Rate  Theories,  etc.,  p.  94. 


LOCAL  DISCRIMINATION 


247 


stance  this  route  properly  rules  the  rate.  Moreover,  the  four 
seaports  may  be  considered  for  traffic  purposes  as  equally  and 
interchangeably  distant  from  one  another  without  regard  to 
location.  This  follows  from  the  fact  that,  except  in  extreme 
instances,  rates  by  water  do  not  vary  according  to  distance, 
so  small  is  the  cost  of  mere  propulsion  by  comparison  with 
the  terminal  costs.     In  other  words,  the  rate  is  the  same  from 


WILMlwaTON" 


CHAR-LE^TON- 


xSAVA^fJ^M.H 


3I^V/f*SWlClC 


Wilmington  to  Brunswick  or  Savamiah  as  to  its  next  neighbor 
Charleston.  From  this  it  follows,  further,  that  Wilmington, 
Savannah,  and  Brunswick  can  all  reach  B  —  the  point  to  which 
Charleston  is  nearest  —  on  even  terms.  They  may  each  have 
a  direct  line  to  B;  but,  as  compared  with  a  possible  combined 
low  water  rate  to  Charleston  and  a  low  direct  rail  rate  inland 
to  B,  the  Charleston  route  may  be  at  least  able  to  hold  its  own. 
All  three  outside  competitors,  then,  are  on  even  terms  with  one 
another  in  respect  of  access  to  B.  But  how  does  Charles- 
ton stand  towards  B  as  against  the  field?     We  have  already 


248  RAILROADS 

concluded  that  a  roundabout  route  must  be  allowed  to  meet, 
though  not  to  undercut,  the  ruling  rate.  Such  a  roundabout 
route  from  Wilmington  on  this  diagram  to  its  own  natural 
tributary  A  could  be,  and  as  a  matter  of  fact  is,  made  by  passing 
around  by  way  of  Charleston  or  any  other  seaport.  Charleston 
wishes  to  share  in  this  trade  at  A,  and  may  reach  it  by  similar 
tactics.  It  stands  towards  A  precisely  as  Wilmington  stands 
towards  B.  They  finally  agree  to  enjoy  both  A  and  B  on  even 
terms.  But,  as  we  have  already  seen,  the  admission  of  Wilming- 
ton to  B  is  equivalent  to  the  admission  of  all  the  rest.  Whence 
it  comes  about  that  all  four  establish  B  as  a  "common  point." 
And  of  course  the  same  procedure  fixes  all  the  others.  A,  C, 
and  D  in  the  same  way.  In  the  Savannah  Fertilizer  case  ^ 
it  appeared  that  there  were  no  fewer  than  148  points  in  ten 
states  from  Louisiana  to  Kentucky,  to  which  rates  on  fertilizers 
were  absolutely  the  same  from  each  of  the  four  seaports.  The 
degree  of  local  discrimination  of  course  was  negligible  at  the 
remoter  places;  but  it  augmented  in  proportion  as  the  immediate 
neighborhood  of  each  seaport  was  approached.  The  apparent 
anomaly  was  greatest  in  a  north  and  south  direction  along  the 
seacoast.  Thus  Dinsmore,  Florida,  was  275  miles  from  Charles- 
ton and  only  160  miles  from  Savannah,  yet  the  rates  from  both 
points  were  the  same.  The  governing  feature  usually  was  the 
entire  equality  of  coastwise  water  rates,  regardless  of  distance, 
which  in  turn  compelled  the  land  lines  to  follow  suit. 

The  Cincinnati  Freight  Bureau  case,  otherwise  known 
as  the  Maximum  Freight  Rate  case,^  affords  the  best  example 
of  the  difficulty  in  practice  of  adjusting  rates  over  different 
and  widely  separated  lines  on  a  distance  basis,  in  order  to 
satisfy  the  demands  of  commercial  competition.  Atlanta, 
Georgia,  the  key  to  the  southern  market,  is  876  miles  by  rail 
from  New  York,  but  only  475  miles  from  Cincinnati  and  733 

'  7  Int.  Com.  Rep.,  458;  reprinted  in  our  Railway  Problems,  chap.  XII. 
2  Chapter  XIV,  infra,   discusses  its  legal  aspect.     Reprinted  in  full 
in  our  Railway  Problems,  chap.  VI. 


LOCAL  DISCRIMINATION  249 

from  Chicago.  In  other  words,  Cincinnati  is  fifty-four  per 
cent,  as  far  from  Atlanta  as  is  New  York;  and  even  Chicago 
is  only  eighty-four  per  cent,  as  remote.  In  general,  this  valu- 
able southern  territory,  on  the  basis  of  mere  distance,  is  really 
nearer  to  the  leading  middle  western  cities  than  to  those  on  the 
Atlantic  seaboard.  Yet  this  geographical  situation  is  not 
reflected  in  the  railway  tariffs.  Rates  from  the  West,  especially 
on  manufactures,  were  much  higher,  always  relatively  and 
often  absolutely.  Thus  first-class  goods  in  1894  paid  $1.47 
per  hundred  from  Chicago  (733  miles),  while  from  New  York 
(876  miles)  the  rate  was  only  $1.14.  At  points  like  Chattanooga 
the  disparity  was  even  greater.  This  city  is  only  595  miles 
from  Chicago  as  against  1,060  miles  from  Boston.  Yet  the 
rates  were  actually  lower  ($1.14)  from  New  England  than  from 
Chicago  ($1.16).  The  principal  reason  for  this  of  course  was 
the  cheap  coastwise  water  competition  by  way  of  Charleston 
and  Savamiah.  The  eastern  all-rail  routes  could  charge  no 
more  than  the  combined  rail-and-water  lines.  The  difference 
in  relative  cost  of  operation  by  water  was  recognized  by  means 
of  so-called  "constructive  mileage."  From  New  York  to 
Savannah  by  sea  is  about  750  miles;  yet  the  allowance  to  the 
steamers  was  proportioned  upon  a  distance  of  only  250  miles. 
Water  cost  was  thus  fixed  by  comparison  with  rail  cost  in  the 
proportion  of  one  to  three.  Yet,  even  with  this  allowance  in 
favor  of  eastern  cities,  New  York  remained  more  distant  from 
Atlanta  than  Cincinnati;  the  "rate-making"  distance  from  the 
former  being  538  miles  as  against  only  475  miles  from  Cin- 
cinnati. The  arbitrary  reduction  of  the  New  York  distance 
left  Chicago  more  remote  (733  miles),  but  not  in  so  great 
degree  as  its  tariffs  implied.  These  tariffs  were  also  peculiar 
in  another  regard.  The  handicap  against  the  western  cities 
was  much  higher  in  respect  of  manufactures  and  high-class 
freight  than  upon  foodstuffs  and  raw  produce.  This  in  turn 
was  clearly  due  to  a  long-established  agreement  between  the 
lines  east  and  west  of  the  Alleghanies,  as  to  a  division  of  the 


250  RAILROADS 

field.  Originally  each  set  of  lines  was  harassed  by  roundabout 
competition  from  the  other.  Western  foodstuffs  and  raw 
produce  were  reaching  the  South  by  way  of  the  Atlantic  sea- 
board; and  eastern  manufactures  from  New  York,  for  in- 
stance, were  rambling  about  over  western  lines  in  order  to 
reach  places  like  Atlanta  and  Augusta,  naturally  served  by 
direct  routes  from  the  East.  The  agreement  to  divide  the 
field,  dating  from  1878,  steadily  became  more  irksome,  however, 
to  the  West,  with  the  development  of  manufactures  of  its  own. 
The  problems  raised  by  this  change  are  too  large  to  be  considered 
here.  The  main  question  for  the  present  inquiry  is  as  to  the 
relative  fairness  of  rates  from  two  widely  separated  centres  to  a 
common  market,  those  rates  not  being  proportioned  to  distance. 
The  final  settlement  of  this  knotty  question  is  sugges- 
tive of  the  extreme  difficulty  of  attempting  to  apply  mileage 
or  distance  rates  over  different  railroads  too  rigidly.  The 
complaint  being  as  to  relativity,  there  were  only  two  possible 
solutions.^  One  was  to  increase  the  eastern  rates,  the  other  to 
order  a  reduction  of  the  charges  from  the  West.  The  former 
course  was  impossible,  owing  to  the  presence  of  water  competi- 
tion by  sea,  not  under  control.  The  latter  alternative  was, 
therefore,  chosen  by  the  Interstate  Commerce  Commission  in 
its  decision  in  1894.  The  rates  from  western  cities  were 
always  composed  of  two  parts.  The  charge  from  the  Ohio 
south  was  kept  distinct  as  a  local  rate.  The  other  portion  of  the 
rate  applied  from  Chicago,  for  example,  down  to  the  Ohio 
river.  Of  these  two  parts,  the  trunk  line  portion  appeared 
reasonable  enough.  It  was  the  southern  local,  often  one 
hundred  per  cent,  higher  than  the  other,  which  seemed  most 
unreasonable;  and  which,  according  to  all  appearances,  had 
been  used  to  bring  about  a  closure  of  the  market  to  western 
manufactured  goods.  Consequently  the  Commission  ordered  a 
reduction  of  the  southern  local  rates,  cutting  them  drastically, 

1  CJ.  testimony  in  Elkins  Committee  Report,  1905,  p.  2726.     The  Com- 
merce Court  case  on  page  588.  infra,  brings  it  to  date. 


LOCAL  DISCRIIMIXATION  251 

but  leaving  the  northern  locals  unchanged.  This  decision  ^yas 
never  carried  into  effect;  as  the  Supreme  Court  of  the  United 
States  held  tlie  Commission  to  have  no  such  rate-making 
power.  Nothing  was  done  apparently  to  remedy  the  disparity 
in  charges  against  the  West,  although  the  railroads  serving 
that  territory  urgently  pressed  for  action.  Every  time  they 
threatened  a  reduction  of  their  western  rates,  the  eastern  line 
came  dowai  in  proportion.  This  left  the  relative  rates  as  before, 
although  the  general  scale  would  be  lower  all  round. 

At  last,  in  1905,  the  eastern  lines  from  Baltimore  south 
agreed  to  permit  a  reduction  of  five  cents  in  the  rates  from 
western  cities  by  lines  north  of  the  Ohio  river;  but  they 
refused  to  accede  to  any  change  in  the  rates  from  the  Ohio 
south.  This  was  the  exact  opposite  of  the  Interstate  Com- 
merce Commission's  proposition,  although  both  plans  were 
intended  to  compass  the  same  object;  namel}^,  to  place  western 
shippers  more  nearly  on  a  parity  with  the  East.  The  Com- 
mission, in  1894,  laid  all  reduction  upon  the  southern  portion 
of  the  rate;  the  railroads,  in  1905,  placed  it  all  upon  the  north- 
ern part.  This  obviously  afforded  no  relief  to  the  original 
complainant,  Cincinnati.  In  fact,  it  actually  operated  to  its 
great  disadvantage,  inasmuch  as  it  let  its  two  powerful  rivals, 
Chicago  and  St.  Louis,  into  the  southern  field  on  distinctly 
more  favorable  terms.  Such  was  the  outcome  as  a  result  of 
the  friction  of  railroad  competition.  The  reasonableness  of 
some  reduction  was  clear.  But  to  the  layman,  the  fairness 
of  laying  the  reduction  entirely  upon  the  northern  locals, 
already  relatively  low,  instead  of  upon  the  extremely  high 
southern  part  of  the  rate  is  not  by  any  means  so  clear. ^ 

One  further  detail  of  this  adjustment  of  southern  rates 
raises  a  question: 

"Rates    between   Riclunond,  Virginia,  and   Atlanta,  Georgia,  are 
less  than  the  rates  between  Riclunond,  Virginia,   and  Greenwood, 

^  Cf.  Answer  of  Receivers'  and  Shippers'  Association  of  Cincinnati  to 
Btatement  of  W.  J.  Murphy,  etc.,  March  15,  1907. 


252  RAILROADS 

South  Carolina  (an  intermediate  point).  This  is  due  to  indirect 
competition  between  Riclmaond  and  Western  jobbing  points;  and  in 
order  to  permit  the  jobber  or  manufacturer  in  Riclimond  to  do  business 
as  against  his  competitor  in  Cincinnati,  it  has  been  necessary  to  fix  the 
rates  from  Riclmiond  to  Atlanta  with  some  reference*  to  the  rates  from 
Cincinnati  to  Atlanta.  At  Greenwood,  South  Carolina,  we  find  that 
the  Cincinnati  shipper  pays  a  very  much  higher  rate  than  to  Atlanta, 
and  that  the  rates  from  Richmond  are  already  sufficiently  low  to 
enable  the  Richmond  shipper  to  compete  at  Greenwood  with  the 
Cincinnati  shipper."  ^ 

Is  this  not  in  a  measure  well  described  in  the  passage, 
"unto  him  that  hath  shall  be  given;  but  from  him  that  hath 
not,  shall  be  taken  aw^ay  even  that  which  he  hath"  ?  This 
railway  argument  contains  dangerous  possibilities.  In  effect, 
upon  the  theory  of  charging  what  the  traffic  will  bear,  it  means 
that  a  railway  (in  this  case  the  Seaboard  Air  Line)  may  in- 
crease its  own  local  rates,  not  in  proportion  to  the  length  of  its 
own  haul  (from  Richmond  to  Greenwood),  but  according  to 
the  remoteness  of  that  local  point  from  another  competing 
market.  •  The  inevitable  effect  of  the  general  adoption  of  such 
a  policy  must  be  to  erect  arbitrary  barriers  to  the  free  and 
wide-spread  movement  of  commerce.  The  great  advantage 
of  the  flat  rate  or  of  commodity  rates  is  that,  placing  all  com- 
peting centres  upon  an  absolute  parity  irrespective  of  distance, 
they  encourage  the  utmost  freedom  of  trade. 

Certain  general  conclusions  seem  to  be  warranted  by  the 
analysis  of  these  cases  of  local  discrimination.  The  first  is 
that  they  all  show  the  extreme  delicacy  of  commercial  adjust- 
ment and  the  existence  of  conditions  well  beyond  the  control 
of  the  carriers,  jointly  or  singly.  Trade  jealousies  in  particular 
—  the  rivalry  of  producing  and  consuming  centres  —  render 
relativity  of  rates  of  paramount  importance  to  shippers.  This 
class  in  the  community  is  interested  comparatively  little  in  the 
absolute  level  of  rates,  that  being  more  directly  the  concern 

1  Senate  (Elkins)  Committee  Report,  1905,  Digest,  Appendix  IIL, 
p.  23L 


LOCAL  DISCRIMINATION  253 

of  the  general  consuming  public.  To  the  public,  as  repre- 
sented by  State  and  Federal  legislatures,  it  is  difficult  to  make 
these  complicated  matters  of  commercial  competition  clear. 
The  only  basis  of  rate  making  that  is  easily  understood  is  one 
founded  in  general  upon  the  distance  principle,  or,  in  other 
words,  correlated  with  considerations  of  cost  of  operation. 
Any  departure  from  this  basis  is  apt  to  breed  suspicion,  and 
at  all  events  puts  the  carrier  upon  the  defence.  It  is  bad 
policy,  in  their  own  interest,  for  railroads  to  permit  a  con- 
tinuance of  such  violations  of  the  distance  principle  in  their 
general  tariffs  (commodity  rates  as  a  special  resource  to  meet 
the  special  needs  of  commercial  competition  may  be  set  aside), 
except  in  extreme  cases.  This  was  recognized  by  the  trunk 
lines  when  they  almost  unanimously  acquiesced  in  the  long 
and  short  haul  provisions  of  the  Act  of  1887.  The  people  of 
the  United  States  have  the  same  right  that  they  had  then,  to 
expect  that  at  the  earliest  possible  moment  the  wise  provisions 
of  the  trunk  line  rate  adjustment  shall  be  widely  accepted  in 
the  West  and  South.  Whether  those  regions,  and  the  railways 
that  reach  them,  have  yet  sufficiently  developed  to  warrant 
the  change  is  a  matter  requiring  careful  consideration  in 
detail. 

The  necessity  of  some  exercise  of  governmental  control 
over  these  carriers  of  the  country,  in  order  to  mitigate,  if 
not  to  eliminate,  local  discrimination  as  far  as  possible,  is 
evident.  Many  of  the  instances  previously  cited  have  clearly 
shown  how  impossible  it  often  is  for  any  railroad,  single-handed, 
to  deal  with  an  involved  situation  in  a  large  way.  Take  the 
Cincinnati  Freight  Bureau  case,  for  instance.  Conceding, 
as  many  would,  the  claim  of  western  cities  to  some  readjijst- 
ment  of  tariffs  in  their  favor,  is  it  not  an  anomaly  that  the 
lines  south  from  Baltimore,  several  hundred  miles  away,  should 
finally  dictate  the  means  to  be  employed  to  remedy  the  situa- 
tion at  Cincinnati  and  Chicago?  AVho  else  but  the  Federal 
government  could  ever  hope  to  disentangle  the  almost  hope- 


254  RAILROADS 

less  snarl  of  competition  involved  in  the  controversy  over 
differentials  to  and  from  the  Atlantic  seaboard?^  This  con- 
troversy is  at  bottom  one  of  local  discrimination.  And  yet 
how  is  the  Interstate  Commerce  Commission  to  aid  in  the 
solution  of  these  intricate  problems  under  present  conditions? 
Its  hands  formerly  doubly  tied,  are  now  in  part  freed  by  re- 
habilitation of  the  long  and  short  haul  clause.  But  it  cannot 
yet  deal  with  minimum  rates,  nor  is  it  clear  that  it  can  prescribe 
differential  rates.^  True,  the  commission  may,  in  some  cases, 
accomplish  by  indirection  its  purpose  of  establishing  a  proper 
relativity  between  rates  through  the  exercise  of  its  newly 
granted  power  to  fix  maximum  rates.  This,  as  we  shall  see, 
was  done  in  the  recent  Spokane  and  Denver  decisions.  Hold- 
ing that  the  charges  at  interior  points  were  out  of  line  with 
through  rates  to  the  Pacific  coast;  and  being  unable  to  govern 
the  long-distance  tariffs,  it  simply  ordered  a  reduction  of  certain 
rates  at  Spokane  and  Denver  as  inherently  unreasonable. 
This  solution  is  not,  however,  always  practicable.  Not  in- 
frequently the  lower  rate  at  the  remoter  point  will  drop  as 
soon  as  the  intermediate  rate  is  lowered.  Thus  the  former 
relativity  of  charges  is  re-established  on  a  generally  lower  scale. 
The  complaint  in  the  Eau  Claire  lumber  case  required  the 
exercise  of  such  power  over  minimum  rates,  in  order  to  remove 
the  disability  against  a  particular  centre.  And  then,  finally, 
it  is  indubitable  that  commercial  competition  as  a  "com- 
pelling" factor  has  been  somewhat  over-emphasized  by  the 
railroads.  Too  often  conditions  in  part  brought  about  by 
themselves,  or  in  which  at  least  they  have  acquiesced,  have 
been  set  up  as  a  defence  for  rates  favoring  certain  points. 
This  is  especially  true  of  the  southern  basing  point  cases.^ 
Whether  any  further  grant  of  powers  to  the  Interstate  Com- 

1  22  I.C.C.  Rep.,  99  is  a  case  of  conceded  injustice  for  fourteen  years; 
yet  of  a  complete  deadlock  between  carriers,  broken  only  by  Federal 
intervention. 

2  Infra.  ^  Chapter  XI,  infra. 


LOCAL  DISCRIMINATION  255 

merce  Commission  by  Congress  is  necessary  at  this  time  in 
order  to  enable  progress  to  be  made  in  this  connection,  it  is  as 
yet  too  soon  to  predict.  The  course  of  affairs  for  the  next  few 
years  will  at  all  events  bear  attentive  watching. 

In  the  case  of  competition  between  a  direct  and  a  longer, 
more  roundabout  line,  which  one  "controls"  or  fixes  the  rate? 
It  is  an  important  matter,  involving  as  it  does  the  economic,  if 
not  the  legal,  right  of  a  carrier  to  participate  in  any  given 
traffic.  Concerning  this  question  the  greatest  diversity  of 
opinion  prevails.  On  the  one  hand,  both  writers  ^  and  practical 
railway  men  ^  aver  that  the  short  line  makes  the  rate,  while 
the  long  line  merely  meets  the  rate  thus  made.  This  is  probably 
the  more  prevalent  opinion.  Yet  expert  evidence  of  an  opposite 
sort  is  to  be  had  for  the  seeking.  The  Interstate  Commerce 
Commission  has  repeatedly  held  that  the  short  line  is  at  the 
mercy  of  the  longer  line  under  certain  circumstances;  ^  and 
traffic  managers  not  infrequently  plead  their  inability  to  control 
rate  situations  in  the  face  of  irrepressible,  roundabout  competi- 
tion.^ There  is  evidently  a  confusion  of  thinking,  or  else  a 
loose  use  of  terms  where  statements  are  so  conflicting.  As  a 
matter  of  voluntary  agreement  among  roads,  or  of  prescribed 
rates  under  government  regulation,  the  issue  often  assumes  the 
form  of  controversy  as  to  whether  a  road  operating  under  a 
physical  disability  shall  be  permitted  to  participate  in  a  given 
business  by  a  concession  in  rates  or  not.  Thus  in  the  notable 
Milk  Rate  cases  it  was  a  question  whether  roads  with  heavy 
grades  should  be  allowed  to  make  concessions  in  rates.     This 

^  Acworth,  "Elements  of  Railway  Economics,"  p.  125. 

2  Testimony  of  J.  J.  Hill,  Senate  (Elkins)  Committee,  1905,  p.  1507; 
certainly  in  the  Missouri-Mississippi  river  territory,  the  Hannibal-St.  Joe 
distance  rules. 

^Especially  in  the  Danville  and  St.  Cloud  cases;  8  Int.  Com.  Rep., 
357  and  429.  Cf.  the  Vermont  Central  case,  1  Idem,  182  and  82:  and  7 
Idem,  481. 

^  An  especially  notable  instance  was  the  Canadian  Pacific  differential 
arbitration  in  1898.     Proceedings,  etc.,  p.  73,  argument  of  J.  C.  Stubbs. 


256  RAILROADS 

issue  really  also  underlies  the  question  of  enforcement  of  the 
long  and  short  haul  clause.  In  the  recent  Spokane  case  the 
Harriman  lines  to  St.  Paul  asked  that  they,  being  long  lines, 
should  not  be  compelled  to  reduce  their  rates  to  the  figure 
prescribed  for  the  direct  Hill  roads. 

It  is  clear  in  the  first  place  that  "short  line"  and  "long  line" 
are  merely  used  as  convenient  terms  to  designate  differences 
in  the  cost  of  operation.  This  was  well  put  by  James  J.  Hill 
before  the  Elkins  Committee  of  1905. 

"  We  will  say  that  the  distance  from  Cincinnati  to  New  York  is 
800  miles,  and  that  they  haul  800  tons  behind  one  locomotive  on  one 
per  cent,  ruling  grades.  Now  somebody  else  builds  a  road  with  a 
0.3  grade,  and  he  can  haul  2,000  tons — twice  and  a  haK  the  amount; 
but  that  line  is  200  miles  longer.  You  can  see  readily  that  to  move 
a  given  number  of  tons  the  second  road  runs  less  than  half  the  train 
miles,  so  that  the  farthest  way  round  is  the  nearest  way  home  in  that 
case." 

The  problem  should  really  be  stated  thus  in  terms  of  cost 
not  of  distance.  Suppose  the  roundabout  line  to  be  in  part  or 
wholly  by  water,  as  in  competition  between  the  transcontinental 
roads  and  the  Isthmian  or  Cape  Horn  routes,  or  as  between  the 
direct  all-rail  line  from  Boston  to  Nashville,  Tenn.,  and  the 
steamer  line  from  Boston  to  Savannah,  and  thence  up  to  Nash- 
ville by  rail.  In  such  cases  the  rail  lines  allow  the  water  routes 
a  differential  or  constructive  mileage  in  recognition  of  their 
relatively  cheaper  per  mile  expenses  of  operation.  The  differen- 
tial may  sometimes  exist,  where,  judging  by  the  bulk  of  traffic- 
the  advantage,  irrespective  of  the  differential,  lies  with  the  line 
giving  the  lower  rate.  In  other  words,  as  measured  by  volume 
of  business,  the  stronger  line  and  not  the  weaker  one  enjoys  the 
benefit  of  the  differential.  This  is  the  case  in  the  coastwise 
traffic  between  Atlantic  and  Gulf  ports;  where  the  bulk  of  the 
tonnage  goes  by  steamer  and  at  lower  rates  than  bj^  all-rail 
lines.  The  difficult  point  to  settle  in  all  such  cases  is  Avhether 
the  allowance  is  made  as  a  voluntary  concession  to  the  round- 
about line  because  it  costs  more  to  operate;  or  whether  it  is  a 


LOCAL  DISCRIMINATION  257 

toll  or  tribute,  because,  irrespective  of  the  cost,  the  long  line  rate 
is  made  on  the  basis  of  value  of  service.  The  problem,  then, 
resolves  itself  into  this :  how  far  in  practice  does  cost  of  opera- 
tion really  "control"  the  rate  in  cases  of  competition  between 
two  lines  differently  circumstanced  in  this  regard?  If  cost  is  of 
fundamental  importance,  the  "short  line,"  using  the  term  as 
above  said  in  a  figurative  sense,  "controls"  the  rate.  If  cost 
is  an  entirely  secondary  matter,  rates  being  made  in  accord- 
ance with  considerations  of  value  of  service,  the  "long  line" 
holds  the  upper  hand,  and  the  short  one  is  at  its  mercJ^ 

It  is  important,  moreover,  in  the  comparison  of  costs  of 
operation,  to  keep  in  view  the  inter-relation  between  fixed 
charges  and  operating  expenses.  This  point  is  often  neglected. 
Any  well-considered  outlay  upon  permanent  improvements,  of 
course,  increases  fixed  charges  according  to  the  extent  of  the 
new  capital  investment;  but  at  the  same  time  it  presumably 
lessens  the  direct  cost  of  operation.  The  interest  upon  funds 
spent  for  heavier  rails,  reduction  of  grades,  straightening  of 
curves,  better  terminals  or  heavier  rolling  stock,  must  be  set 
over  against  the  direct  economies  resulting  from  heavier  train 
loads,  lessened  expenditure  for  wear  and  tear,  for  accidents 
and  claims  or  for  wages.  This  relation  between  current  ex- 
pense and  capital  cost  was  clearly  emphasized  in  an  arbitra- 
tion decision  by  the  late  S.  R.  Blanchard,  already  cited  in 
another  connection.  Two  roads  were  in  competition  for  busi- 
ness at  New  Orleans.  One  had  costly  but  convenient  terminal 
facilities.  The  other  was  so  far  from  the  heart  of  the  city  that 
the  drayage  expenses  were  an  important  item.  This  second 
railway  began  by  offering  free  cartage  to  shippers  in  order  to 
even  up  with  its  more  favored  competitor;  but  this  soon  gave 
way  to  the  practice  of  private  teaming  by  shippers  with  an 
allowance  on  the  freight  bill  for  "drayage  equalization."  The 
other  road  objected  to  this  on  the  ground  that  it  constituted  a 
virtual  rebate;  that  in  other  words  the  weaker  line  was  taking 
business  at  an  abnormally  low  rate.     The  arbitrator,  however, 

VOL.  I — 17 


258  RAILROADS 

upheld  the  practice,  on  the  ground  that  the  heavier  operating 
expense  for  cartage  was  merely  an  alternative  for  increased 
interest  charges,  had  the  road  elected  to  construct  costly  and 
more  convenient  terminals.  One  road  virtually  paid  money 
for  team  hire,  the  other  paid  it  in  interest  on  bonds. 

Analyzing  the  main  question  two  propositions  are  certain. 
Firstly,  the  long  line  can  never  charge  more  than  the  short 
line;   whence  it  follows  that  as  the  short  line  reduces  its  rate, 
the  long  one  must  accept  that  rate  as  made;    and,  secondly, 
the  long  line,  costing  more  to  operate,  is,  in  the  process  of  re- 
duction of  rates,  bound  to  be  the  first  to  strike  the  bed-rock 
of  cost  incident  to  that  particular  service.     To  go  below  this 
point  of  particular  cost  would  obviously  be  indefensible  from 
every  point  of  view.     The  general  rule,  then,  is  that  "the  short 
line  rules  the  rate."     This  is  accepted  widely  in  practice,  as  for 
example  throughout  trunlv  line  territory  and  between  the  so- 
called  Missouri-Mississippi  river  points,  where  the  short  line 
from  Hannibal  to  St.  Joseph  determines  all  rates  by  longer 
routes.^     But  the  problem  yet  remains  unsolved.     The  long 
line  may  never  be  able  to  charge  more  than  the  short  line  — 
may  it,  however,  charge  less  under  certain  conditions?    The 
moment  it  is  enabled  to  do  so,  the  long  line  and  not  the  short 
line,  for  the  moment,  "controls  the  rate."     If,  now,  we  use  the 
technically  proper  terms,  the  question  becomes  this:    Under 
what  circumstances  is  average  cost  of  service  in  railway  com- 
petition set  aside  in  favor  of  other  considerations;  or,  otherwise 
stated,  when  may  a  line,  operated  under  a  disability  as  to  cost, 
properly  give  a  lower  rate  than  its  competitors  notwithstanding? 
Does  disability  justify  a  handicap  or  the  reverse?     This  was 
the  form  which  the  question  assumed  in  the  notable  Milk  Rate 
case:   as  to  whether  the  weaker  lines  in  respect  of  distance  or 
grades  should  be  allowed  compensation  therefor  by  permission 
to  charge  higher  rates. 

1  It  is  also  the  rule  in  France.     Senate  (Elkins)  Committee,  V,  p.  273. 
Cf.  the  Superior  grain  case.     l.C.C,  decided  June  25,  1912. 


LOCAL  DISCRIMINATION  259 

One  of  the  common  instances  of  rate  control  by  a  line 
operating  under  a  disability  as  to  distance  or  normal  cost  is 
the  competition  of  a  bankrupt  with  a  solvent  property.  The 
"roundabout"  line,  like  the  Erie  or  the  old  New  York  and 
New  England,  having  repudiated  its  fixed  charges,  undoubtedly 
"makes"  the  rate  which  the  other  roads  must  meet  or  lose 
the  traffic.  Usually  they  prefer  to  absorb  or  control  it  other- 
wise, financially,  thus  substituting  monopoly  for  a  ruinous  con- 
dition of  competition.  Yet  such  instances  resolve  themselves, 
evidently,  into  questions  of  relative  cost  of  operation  after  all. 
The  bankrupt  road  holds  the  whip  hand,  because,  having 
repudiated  its  fixed  charges,  its  average  costs  of  operation  are 
correspondingly  reduced.  The  validity  of  operating  cost  as  a 
basis  of  charges  is  surely  not  shaken  by  this  exceptional  case. 

The  relative  proportions  and  the  distribution  of  local  and 
through  traffic  upon  two  lines  of  differing  length  in  competi- 
tion with  one  another  are  primary  factors  in  determining 
the  ability  of  either  one  to  "make  the  rate."  This  is,  of  course, 
especially  true  under  the  operation  of  any  long  and  short 
haul  law,  under  which  any  reduction  of  the  competitive  rates 
would  necessitate  a  lowering  of  the  charges  at  intermediate 
points.  No  road  is  going  to  sacrifice  lucrative  rates  upon  a 
large  volume  of  local  traffic  unless  it  can  gain  either  a  large 
volume  of  business  or  a  very  long  haul  from  a  competitive 
point.  Many  of  the  notorious  rate  disturbers  in  our  industrial 
history  have  been  "short  cut"  roads  —  the  shortest  lines 
between  given  important  points,  regardless  of  the  nature  of 
the  intervening  territory  —  like  the  old  New  York  and  New 
England,  the  Erie  or  the  Canada  Southern.  Other  roads,  like 
the  Chicago  Great  Western  or  the  Central  Vermont,  were 
more  roundabout,  and  yet  enjoyed  but  little  local  business, 
depending  almost  exclusively  for  their  livelihood  upon  long 
hauls  between  termini.  On  the  Central  Vermont  at  one  time, 
through  business  constituted  seventy-nine  per  cent,  of  the 
total;   and  only  five  per  cent,  was  strictly  local  in  origin.     On 


260  RAILROADS 

the  other  hand,  the  Louisville  &  Nashville,  in  its  original  peti- 
tion for  exemption  from  the  long  and  short  haul  clause,  stated 
that  eighty  per  cent,  of  its  income  was  derived  from  local  busi- 
ness. This  consideration,  as  applied  to  competition  between 
the  two  primary  trmik  lines,  may  not  be  without  significance. 
As  compared  with  the  Pennsylvania  Railroad,  rich  in  local 
business,  the  New  York  Central,  running  along  the  narrow  Mo- 
hawk and  Hudson  valleys,  has  not  inaptly  been  described  as 
operating  "between  good  points,  but  not  through  a  good  coun- 
try." Under  a  strict  enforcement  of  the  long  and  short  haul 
clause,  the  dilemma  on  the  former  road  would  be  more  seri- 
ous than  on  the  latter.  To  choose  between  its  rich  local 
traffic  in  iron  and  steel  or  coal  and  the  long  haul  business 
from  the  West,  would  be  a  more  difficult  matter  for  the  Penn- 
sylvania, than  for  the  New  York  Central  management  to  weigh 
its  through  grain  business  against  the  local  traffic  from  interior 
New  York  points. 

In  one  way  the  persistence  of  locally  high  rates  in  the  South 
and  West,  irrespective  of  the  low  charges  at  competitive  points, 
is  defensible  on  the  gromid  that  local  business  is  scanty.^  The 
roads  cannot  live  upon  it.  Their  mainstay  is  the  long-distance 
traffic  from  important  points.^  On  the  other  hand,  where 
there  is  no  obligation  to  maintain  a  distance  tariff,  of  course 
the  road  with  rich  local  business  enjoys  a  great  advantage  in 
making  rates  at  competitive  points.  It  can  practically  subsist 
upon  its  revenue  from  its  o\Nai  particular  constituency,  meeting 
all  its  fixed  charges  thereby;  and  can  afford  to  cut  rates  on  the 
competitive  tonnage  down  to  the  bone.  Such  a  road,  quite 
irrespective  of  the  length  of  its  line,  would  obviously  "control" 
the  rate  at  competitive  points,  as  against  any  rival  without  such 
a  subsidiary  and  independent  source  of  income.* 

1  C/.  Mr.  Fink's  testimony  in  Hearings  Senate  Committee  on  Inter- 
state Commerce,  51st  Cong.  1st  session,  Sen.  Rep.,  847,  p.  29. 

2  Solution  of  transcontinental  dilemma  depends  upon  this  choice. 
Railway  Age  Gazelle,  Nov.  25,  1910.     CJ.  chaps.  XI  and  XIX,  infra. 

3  19  I.C.C.  Rep.,  218  affords  an  excellent  example  as  between  the  Union 


LOCAL  DISCRIMINATION  261 

Volume  of  traffic  is  another  fundamental  element  in  the 
determination  of  cost  of  operation.  No  matter  how  short  the 
line  or  how  easy  its  curves  and  grades,  unless  it  can  handle 
its  tonnage  in  large  bulk  it  will  operate  at  a  disadvantage. 
Hence  a  most  important  factor  to  be  reckoned  with,  in  deciding 
which  of  two  competing  lines  is  in  a  commanding  position 
as  to  rates,  is  the  volume  of  traffic,  both  in  gross  and  as  sus- 
ceptible of  concentration  on  either  line.  In  the  notable  Chat- 
tanooga case,  for  example,  although  the  line  from  New  York 
to  Nashville,  passing  around  to  the  south  by  way  of  Chat- 
tanooga, is  212  miles  shorter  than  the  lines  via  Cincinnati  or 
Louisville,  the  latter,  by  reason  of  the  density  of  traffic  in 
trunk  line  territorj^,  seem  to  stand  at  least  on  an  even  footing. 
On  the  other  hand,  the  enjoyment  of  the  bulk  of  the  tonnage 
sometimes  places  its  possessor  at  the  mercy  of  a  petty  rival. 
The  Fall  River  water  line  to  New  York,  carrying  an  over- 
whelming preponderance  of  the  business,  obviously  could  not 
afford  to  cut  rates  to  prevent  the  Joy  Line  from  stealing  a 
small  portion  of  the  traffic.  The  same  principle  holds  good 
in  other  lines  of  business.  The  Standard  Oil  Company  can 
better  afford  permanently  to  concede  a  small  fraction  of  busi- 
ness to  a  sm.all  independent  dealer,  so  long  as  he  knows  his  place 
and  refrains  from  ambition  to  enlarge,  rather  than  to  attempt 
to  drive  him  out  entirely  by  cutting  prices  on  a  huge  volume 
of  business.  Occasionally  independents  are  shrewd  enough 
to  take  advantage  of  this;  and  so  to  distribute  their  business 
that  they  shall  in  no  single  place  menace  a  powerful  rival, 
and  yet  comfortably  subsist  on  the  gleanings  over  a  wide 
area.^  In  no  single  locality  are  they  important  enough  to  ex- 
terminate, at  the  cost  of  cut  rates  applied  to  a  large  volume 
of  business;    and  yet  in  the  aggregate  they  may  make  quite 

Pacific  and  the  Denver  and  Rio  Grande.  Also  the  Montgomery,  Ala.,  case 
in  the  Commerce  Court,  p.  590,  infra.  Also  the  Union  Pacific  Merger 
case,  Brief  of  Facts  for  Appellants,  1912,  p.  276. 

1  For  an  instance  in  the  tobacco  business:    Cf.  The  Atlantic  Monthli/, 
1908,  p.  487. 


262  RAILROADS 

a  fair  livelihood.  The  only  difference  between  the  status  of 
a  railway  and  other  lines  of  business  in  this  regard  is  that 
the  railway  may  not  be  quite  so  free  to  deploy  its  forces.  Its 
territory  and  tonnage  are  more  definitely  circumscribed  by 
physical  conditions  of  location. 

A  point  to  be  noted  in  this  same  connection  is  the  relative 
stability  of  the  traffic.  Is  it  concentrated  in  a  few  hands  or 
does  it  arise  from  many  scattered  sources?  In  the  former 
case  either  road  by  making  a  bold  stroke  may  so  entirely  cap- 
ture the  business  that,  by  reason  of  the  enhanced  volume, 
a  handicap  in  operation  may  be  overcome.  Thus,  in  the 
notable  instance  of  trunk  line  competition  for  the  beef  traffic 
some  twenty  years  ago,  the  Grand  Trunk,  although  much 
more  roundabout,  besides  being  handicapped  in  other  ways, 
by  securing  all  the  business,  could  afford  to  make  rates  impos- 
sible under  other  circumstances. 

Whether  the  business  in  question  is  natural  or  normal  to 
a  road,  or  is  an  extra,  diverted  from  other  more  direct  lines, 
is  still  another  factor  of  importance  affecting  ability  to  com- 
pete successfully  for  any  given  traffic.  The  best  statement  of 
this  is  found  in  the  argument  of  J.  C.  Stubbs  before  the  Arbi- 
tration Board  on  Canadian  Pacific  Differentials  in  1898.^ 
"These  are  differentials  in  favor  of  weaker  lines  —  lines  which 
upon  the  merits  of  their  service  cannot  successfully  compete 
for  the  business,  but  claim  a  share  of  it  as  the  reward  of  virtue, 
the  price  of  maintaining  reasonable  rates.  .  .  .  For  example, 
the  Canadian  Pacific  road  was  not  projected  or  built  for  the 
purpose  of  developing,  fostering,  or  sharing  the  carr^dng  trade 
between  San  Francisco  and  the  eastern  part  of  the  United 
States.  .  .  .  After  they  were  built  and  the  various  connections 
made,  then,  and  not  until  then,  it  was  seen  that  there  was  a 
business  opened.  The  route  having  been  opened,  the  newer 
and  longer  lines  entered  the  field  of  competition  against  the 
older,  shorter,  and  more  direct  lines  by  cutting  the  latter's 

1  Page  72. 


LOCAL  DISCRIMINATION  263 

rates.  ...  In  a  fight  of  this  kind,  paradoxical  as  it  may  seem, 
the  stronger  line  always  got  the  worst  of  it.  .  .  .  The  weaker 
or  longer  line,  not  having  any  business  at  the  outset,  had  noth- 
ing to  lose.  Everything  was  gain  to  it,  which  appeared  to 
show  an  earning  above  the  actual  cost  of  handling  the  particular 
lot  of  freight.  Quite  a  distinction  between  that  and  the  aver- 
age cost  of  handling  all  business.  Such  an  unequal  warfare 
could  not  long  continue,  and  the  common  result  was  that  the 
stronger  line  sought  for  terms,  and  ultimately  bought  the 
weaker  line  off,  .  .  .  this  class  of  differentials  is  and  always 
has  been  obnoxious." 

Our  final  conclusion  must  therefore  be  that  the  outcome  in 
cases  of  unequal  competition  in  respect  of  cost  of  operation 
can  seldom  be  predicted  with  certainty.  Everything  depends 
upon  local  circumstances  and  conditions.  Sometimes  the  long 
line  and  sometimes  the  short  fine  will  dominate.  Careful 
analysis  of  every  feature  of  the  business  must  be  made  before 
positive  affirmation  is  possible.  This  result  is  at  all  events 
worth  noting.  A  due  appreciation  of  the  complexity  of  the 
business  of  rate  making  may  safeguard  us  against  the  cock- 
sure statements  of  the  novice,  who  has  never  closely  examined 
into  the  subject.  President  Taft  has  recently  emphasized  the 
need  of  expert  service  in  the  field  of  customs  and  tariff  legis- 
lation. It  is  greatly  to  be  hoped  that  a  similar  appreciation 
of  the  care  with  which  railway  legislation  should  proceed  may 
prevail  at  Washington  during  the  present  session  of  Congress. 


CHAPTER  VIII 

PROBLEMS   OF  ROUTING 

Neglect  of  distance,  an  American  peculiarity,  264.  —  Derived  from  joint 
cost,  265.  —  Exceptional  cases,  265.  —  Economic  waste  in  American 
practice,  268.  —  Circuitous  rail  carriage,  269.  —  Water  and  rail-and- 
water  shipments,  273.  —  Carriage  over  undue  distance,  277.  —  An  out- 
come of  commercial  competition,  278.  —  Six  causes  of  economic  waste, 
illustrated,  280.  —  Pro-rating  and  rebates,  281.  —  Five  effects  of  dis- 
regard of  distance,  288.  —  Dilution  of  revenue  per  ton  mile,  289.  — 
Possible  remedies  for  economic  waste,  292.  —  Pooling  and  rate  agree- 
ments, 293.  —  The  long  and  short  haul  remedy,  295. 

The  general  acceptance,  both  in  practice  and  theory,  of  the 
principle  that  distance  is  a  relatively  unimportant  element  in 
rate  making  ^  is  significant  at  this  time,  in  connection  with  the 
recent  amendment  of  the  Act  to  Regulate  Commerce.  It  is 
important  also  because  of  the  marked  tendency  toward  the 
adoption  by  various  state  legislatures  of  the  extreme  opposite 
principle  of  a  rigid  distance  tariff.  The  old  problem  of  effecting 
a  compromise  between  these  two  extreme  theories  by  some 
form  of  long  and  short  haul  clause  —  the  original  section  4  of 
the  act  of  1887  having  been  emasculated  by  judicial  interpre- 
tation —  is  again  brought  to  the  front.  For  these  reasons  it 
may  be  worth  while  to  consider  certain  results  which  inevitably 
follow  the  widespread  acceptance  of  this  principle  of  the  blanket 
rate.  Its  benefits  are  indeed  certain;  namely,  an  enlargement 
of  the  field  of  competition,  and  an  equaUzation  of  prices  over 
large  areas,  and  that  too  at  the  level  of  the  lowest  or  most 
efficient  production.  But  these  advantages  entail  certain 
consequences  —  of  minor  importance,  perhaps,  but  none  the 
less  deserving  of  notice. 

1  P.  133,  suj)ra. 


PROBLEMS  OF  ROUTING  265 

The  subordination  of  distance  to  other  factors  in  rate 
making  is  a  logical  derivation  from  the  theory  of  joint  cost. 
This  theory  justifies  the  classification  of  freight,  namely,  a 
wide  range  of  rates  nicely  adjusted  to  what  the  traffic  in  each 
particular  commodity  Avill  bear,  while  always  allowing  each  to 
contribute  something  toward  fixed  and  joint  expenses.  In  the 
same  way  it  explains  a  close  correlation  of  the  distance  charge 
to  what  each  commodity  will  bear.  It  assumes  that  any  rate, 
however  low,  which  will  yield  a  surplus  over  expenses  directly 
incidental  to  the  increment  of  traffic  and  which  thus  contrib- 
utes something  toward  indivisible  joint  costs,  serves  not  only 
the  carrier  by  increasing  his  gross  revenue,  but  at  the  same  time 
lightens  the  burden  of  fixed  expenses  upon  the  balance  of  the 
traffic.  This  principle  of  joint  cost,  so  clearly  set  forth  by  Pro- 
fessor Taussig,^  is  fundamental  and  comprehensive.  It  per- 
vades every  detail  of  rate  making.  But  it  rests  upon  two  basic 
assumptions  which,  while  generally  valid,  are  not  universally 
so.  In  the  first  place  each  increment  of  traffic  must  be  new 
business,  not  tonnage  %vrested  from  another  carrier  and  offset 
by  a  loss  of  other  business  to  that  competitor.  And  secondly, 
each  increment  of  traffic  must  be  economically  suitable  to  the 
particular  carriage  in  contemplation. 

The  first  of  these  assumptions  fails  wherever  two  carriers 
mutually  invade  each  other's  fields  or  traffic.  Each  is  accept- 
ing business  at  a  virtual  loss,  all  costs  including  fixed  charges 
on  capital  being  taken  into  account,  in  order  to  secure  the  in- 
crement of  business.  Each  gain  is  offset  by  a  corresponding 
loss.  It  is  the  familiar  case  of  the  rate  war.  A  less  famifiar 
aspect  of  the  matter  is  presented  when  traffic  is  disadvantage- 
ously  carried  by  two  competing  roads,  each  diverting  business 
from  its  natural  course  over  the  other's  line.  The  sum  total  of 
traffic  is  not  increased.  Each  carries  only  as  much  as  before 
but  transports  its  quota  at  an  abnormal  cost  to  itself.  This 
may,  perhaps,  swell  gross  revenues;  but  by  no  process  of  leger- 
1  Quarterly  Journal  of  Economics,  V,  1891,  p.  438. 


266  RAILROADS 

demain  can  the  two  losses  in  operating  cost  produce  a  gain  of 
net  revenue  to  both.  And  each  mcrease  of  unnatural  tonnage, 
where  offset  by  a  loss  of  natural  business,  instead  of  serving 
to  lighten  the  fixed  charges,  becomes  a  dead  weight  upon  all 
the  remaining  traffic.  The  commonest  exemplification  of  this 
is  found  in  the  circuitous  transportation  of  goods,  instances  of 
which  will  be  given  later. 

The  second  case  in  which  the  principle  of  joint  cost  fails  to 
justify  charges  fixed  according  to  what  the  traffic  will  bear  may 
arise  in  the  invasion  of  two  remote  markets  by  one  another; 
or,  as  it  might  be  more  aptly  phrased,  in  the  overlapping  of  two 
distant  markets.  A  raihoad  is  simultaneously  transporting 
goods  of  like  quality  in  opposite  directions.  Chicago  is  selling 
standard  hardware  in  New  York,  while  New  York  is  doing  the 
same  thing  in  Chicago.  Prices  are  the  same  in  both  markets. 
Of  course  if  the  two  grades  of  hardware  are  of  unequal  quahty, 
or  if  they  are  like  goods  produced  at  different  cost,  an  entirely 
distinct  phase  of  territorial  competition  is  created.  But  we  are 
assuming  that  these  are  standard  goods  and  that  there  are  no 
such  differences  either  in  quality  or  efficiency  of  production. 
What  is  the  result?  Is  each  increment  of  business  to  the  rail- 
road a  gain  to  it  and  to  the  community?  The  goods  being 
produced  at  equal  cost  in  both  places,  the  transportation  charge 
must  be  deducted  from  profits.  For  it  is  ob\dous  that  the  sell- 
ing price  cannot  be  much  enhanced.  The  level  of  what  the 
traffic  ^\dll  bear  is  determined  not,  as  usual,  by  the  value  of  the 
goods  but  by  other  considerations.  The  traffic  will  bear  rela- 
tively little,  no  matter  how  high  its  grade.  The  result  is  that 
the  carrier,  in  order  to  secure  the  tonnage,  must  accept  it  at  a 
very  low  rate,  despite  the  length  of  the  haul. 

This  is  the  familiar  case  of  the  special  or  commodity  rate 
granted  to  build  up  business  in  a  distant  market.  Special  rates 
confessedly  form  three-fourths  of  the  tonnage  of  American  rail- 
ways, as  has  already  been  said.  The  assumption  is  usually 
made  that  such  traffic  is  a  gain  to  the  railways,  justified  on  the 


PROBLEMS  OF  ROUTING  267 

principle  of  joiat  cost  as  already  explained.  But  does  it  really 
hold  good  in  our  hj-pothetical  case?  There  is  a  gain  of  traffic 
in  both  directions,  to  be  sure.  But  must  it  not  be  accepted  at 
so  low  a  rate  that  it  falls  perilously  near  the  actual  operating 
cost?  It  is  possible  that  even  here  it  may  add  something  to  the 
carriers'  revenue,  and  thereby  hghten  the  joint  costs  in  other 
directions.  But  how  about  the  community  and  the  shippiag 
producers?  Are  any  more  goods  sold?  Perhaps'  the  wddened 
market  may  stimulate  competition,  unless  that  is  already  keen 
enough  among  local  producers  in  each  district  by  itself.  The 
net  result  would  seem  to  be  merely  that  the  railroads'  gain  is 
the  shippers'  loss.  There  is  no  addition  to,  but  merely  an 
exchange  of,  place  values.  Both  producers  are  doing  business 
at  an  abnormal  distance  under  mutually  disadvantageous 
circumstances.  It  may  be  said,  perhaps,  that  the  situation 
will  soon  correct  itself.  If  the  freight  rates  reduce  profits,  each 
group  of  producers  will  tend  to  draw  back  from  the  distant 
field.  This  undoubtedly  happens  in  many  cases.  But  the 
influence  of  the  railway  is  antagonistic  to  such  withdrawal. 
It  is  the  railway's  business  to  widen,  not  to  restrict,  the  area 
of  markets.  "The  more  they  scatter  the  better  it  is  for  the 
railroads."  "Keep  everyone  in  business  everywhere."  And 
if  necessary  to  give  a  fillip  to  languishing  competition,  do  so 
by  a  concession  in  rates.  Is  there  not  danger  that  ^\ith  a  host 
of  eager  freight  sohcitors  in  the  field,  and  equally  ambitious 
traffic  managers  in  command,  a  good  thing  may  be  overdone, 
to  the  disadvantage  of  the  railway,  the  shippers  and  the  con- 
suming public? 

An  objection  to  this  chain  of  reasoning  arises  at  this  point. 
Why  need  the  public  or  other  shippers  be  concerned  about  the 
railways'  pohcy  in  this  regard?  Is  not  each  railway  the  best 
judge  for  itself  of  the  profitableness  of  long-distance  trafiic? 
Will  it  not  roughly  assign  limits  to  its  own  activities  in  extend- 
ing business,  refusing  to  make  rates  lower  than  the  actual  inci- 
dental cost  of  operation?     And  are  not  all  low  long-distance 


268  RAILROADS 

rates,  in  so  far  as  they  contribute  something  toward  joint  cost, 
an  aid  to  the  short  haul  traffic?  The  answer  will  in  a  measure 
depend  upon  our  choice  between  two  main  lines  of  policy;  the 
one  seeking  to  lower  average  rates,  even  at  the  expense  of  in- 
creasing divergence  between  the  intermediate  and  the  long 
distance  points,  the  other  policy  seeking,  not  so  much  lower 
rates  as  less  discriminatory  rates  between  near  and  distant 
points.  In  the  constant  pressure  for  reduced  rates  in  order  to 
widen  markets  it  is  not  unnatm-al  that  the  intermediate  points, 
less  competitive  probably,  should  be  made  to  contribute  an 
undue  share  to  the  fixed  sum  of  joint  costs.  The  common 
complaint  today  is  not  of  high  rates  but  of  relative  inequalities 
as  between  places.  It  is  a  truism  to  assert  that  it  matters  less 
to  a  shipping  point  what  rate  it  pays  than  that  its  rate,  however 
high,  should  be  the  same  for  all  competing  places.  This  im- 
mediately forces  us  to  consider  the  consumer.  What  is  the 
effect  upon  the  general  level  of  prices  of  the  American  policy 
of  making  an  extended  market  the  touchstone  of  success,  irre- 
spective of  the  danger  of  wastes  arising  from  overlapping  mar- 
kets? That  the  result  may  be  a  general  tax  upon  production 
is  a  conclusion  with  which  we  shall  have  later  to  do.  Such 
a  tax,  if  it  exists,  would  go  far  to  offset  the  profit  which  unduly 
low  freight  rates  in  general  have  produced.  In  short,  the 
problem  is  to  consider  the  possible  net  cost  to  the  American 
people  of  our  highly  envolved  and  most  efficient  transportation 
system.  Our  markets  are  so  wide,  and  our  distances  so  vast, 
that  the  problem  is  a  peculiarly  American  one. 

Having  stated  the  theory  of  these  economic  wastes,  we  may 
now  proceed  to  consider  them  as  they  arise  in  practice.  Con- 
crete illustration  of  the  effect  of  disregard  of  distance  naturally 
falls  into  two  distinct  groups.  Of  these  the  first  concerns  the 
circuitous  carriage  of  goods;  the  second,  their  transportation 
for  excessive  distances.  Both  alike  involve  economic  wastes, 
in  some  degree  perhaps  inevitable,  but  none  the  less  deserving 
of  evaluation.     And  both  practices,  even  if  defensible  at  times, 


PROBLEMS  OF  ROUTING  269 

are  exposed  to  constant  danger  of  excess.  It  will  be  conveni- 
ent also  to  differentiate  sharply  the  all-rail  carriage  from  the 
combined  rail  and  water  transportation.  For  as  between  rail- 
roads and  waterways,  the  difference  in  cost  of  service  is  so  un- 
certain and  fluctuating  that  comparisons  on  the  basis  of  mere 
distance  have  little  value. 

Recent  instances  of  wasteful  and  circuitous  all-rail  transpor- 
tation are  abundant.  A  few  typical  ones  will  suflSce  to  show 
how  common  the  e\al  is.  President  Ramsay  of  the  Wabash 
has  testified  as  to  the  roundabout  competition  with  the  Penn- 
sylvania Railroad  between  Philadelphia  and  Pittsburg  by  which 
sometimes  as  much  as  fifty-seven  per  cent,  of  traffic  between 
those  two  points  may  be  diverted  from  the  direct  route.  "They 
haul  freight  700  miles  around  sometimes  to  meet  a  point  in 
competition  200  miles  away."  ^  Chicago  and  New  Orleans 
are  912  miles  apart,  and  about  equally  distant  —  2,500  miles  — 
from  San  Francisco.  The  traffic  manager  of  the  Illinois  Central 
states  that  that  company  "engages  in  San  Francisco  business 
directly  via  New  Orleans  from  the  Chicago  territory,  and  there 
is  a  large  amount  of  that  business,  and  we  engage  in  it  right 
along."  -  Wool  from  Idaho  and  Wyoming  may  move  west 
800  miles,  to  San  Francisco;  and  thence  via  New  Orleans  over 
the  Southern  Pacific  route  to  Boston.^  This  case,  therefore, 
represents  a  superfluous  lateral  haul  of  nearly  a  thousand  miles 
between  two  points  2,500  miles  apart.  The  Canadian  Pacific 
used  to  take  business  for  San  Francisco,  all  rail,  from  points  as 
far  south  as  Tennessee  and  Arkansas,  diverting  it  from  the 
direct  way  via  Kansas  City.^ 

Goods  moving  in  the  opposite  direction  from  San  Francisco 

1  Senate  (Elkins)  Committee  Report,  1905,  III,  pp.  2152-2153.  The 
transverse  Buffalo,  Rochester  and  Pittsburg  seems  to  be  the  feeder  for  the 
New  York  Central  and  the  Reading. 

2  Ibid.,  IV,  p.  2849. 

*U.  P.  Merger  case:  Supreme  Court,  October  term,  No.  820,  Appel- 
lant's Brief  of  Facts,  pp.  135-193  and  also  p.  493. 

*  Question  of  Canadian-Pacific  Differentials,  Hearings,  etc.,  Oct.  12, 
1898,  p.  115.     Privately  printed.     Cf.  also  the  Sunset  Route,  ibid.,  p.  116. 


270  RAILROADS 

have  been  hauled  to  Omaha  by  way  of  Winnipeg,  journeying 
around  three  sides  of  a  rectangle  by  so  doing,  in  order  to  save 
five  or  six  cents  per  hundred  pounds.  ^    Between  New  York  and 
New  Orleans  nearly  one  hundred  all-rail  lines  may  compete  for 
business.     The  direct  route  being  1,340  miles,  goods  may  be 
carried  2,051   miles  via  Buffalo,  New   Haven   (Indiana),  St. 
Louis  and  Texarkana.^    A  generation  ago  conditions  were  even 
worse,  the  various  distances  by  competitive  routes  between 
St.  Louis  and  Atlanta  ranging  from  526  to  1,855  miles.''     New 
York  business  for  the  West  was  often  carried  by  boat  to  the 
mouth  of  the  Connecticut  river,  and  thence  by  rail  over  the 
Central  Vermont  to  a  connection  with  the  Grand  Trunk  for 
Chicago.     To  be  moved  at   the   outset   due  north  200  miles 
from   New  York   on  a  journey   to   a   point  —  Montgomery, 
Alabama  —  south  of  southwest  seems  wasteful;    yet  the  New 
York  Central  is  in  the  field  for  that  business.''    The  map  here- 
with, prepared  in  connection  with  the  Alabama  Midland  case, 
shows  the  number  of  lines  participating   in   freight  carriage 
between  New  York  and  the  little  town  of  Troy,  Alabama. 
It  is  nearly  as  uneconomical  as  in  the  old  days  when  freight 
was  carried  from  Cincinnati  to  Atlanta  via  the  Chesapeake 
and  Ohio,  thence  down  by  rail  to  Augusta  and  back  to  desti- 
nation.^   It  was  common  for  freight  from  Pittsburg  to  go  by 
boat  down  to  Cincinnati,  only  to  return  by  rail  via  Pittsburg 
to  New  York  at  a  lower  rate  than  on  a  direct  shipment.^     Even 
right  in  the  heart  of  eastern  trunk  line  territory,  such  things 
occur  in  recent  times.     The  Cincinnati,  Hamilton  and  Dayton 
prior  to  itsconsofidation  with  the  Pere  Marquette  divided  its 

1  51st  Congress,  1st  sess.,  Sen.  Rep.,  No.  847,  p.  176. 

2  Pubs.  Amer.  Stat.  Ass.,  June,  1896,  p.  73. 

^  Reports  Internal  Commerce,  1876,  pp.  54r-59. 

*  Map  in  Brief  of  Ed.  Baxter,  U.  S.  Supreme  Court  in  the  Alabama 
Midland  case. 

'  Windom  Committee,  II,  p.  79.5. 

^  Cullom  Committee,  p.  530.  Hudson  also  cites  similar  cases  from  the 
Hepburn  Committee.  Cf.  also  Report  on  Internal  Commerce,  1876,  App. 
p.  57. 


PROBLEMS  OF  ROUTING 


271 


eastbound  tonnage  from  the  rich  territory  about  Cincinnati 
among  the  trunk  hnes  naturally  tributary.  But  no  sooner 
was  it  consolidated  with  the  Michigan  road  than  its  eastbound 


freight  was  diverted  to  the  north  —  first  hauled  to  Toledo, 

Detroit  and  even  up  to  Port  Huron,  thence  moving  east  and 

around  Lake  Erie  to  Buffalo. ^     In  the  Chicago  field  similar 

1  New  York  Evening  Post,  Sept.  30,  1905. 


272  RAILROADS 

practices  occur.  Formerly  the  Northwestern  road  was  charged 
with  making  shipments  from  Chicago  to  Sioux  City  via  St. 
Paul.  This  required  a  carriage  of  670  miles  between  points 
only  536  miles  apart;  and  the  complaint  arose  that  the  round- 
about rate  was  cheaper  than  the  rate  by  the  direct  routes.  I 
am  privately  informed  that  the  Wisconsin  Central  at  present 
makes  rates  between  these  same  points  in  conjunction  with 
the  Great  Northern,  the  excess  distance  over  the  direct  route 
being  283  miles.  Complaints  before  the  Elkins  Committee  ^ 
are  not  widely  different  in  character.  Thus  it  appears  that 
traffic  is  hauled  from  Chicago  to  Des  Moines  by  way  of  Fort 
Dodge  at  lower  rates  than  it  is  carried  direct  by  the  Rock  Island 
road,  despite  the  fact  that  Fort  Dodge  is  eighty  miles  north 
and  a  little  west  of  Des  Moines.  The  Illinois  Central,  having 
no  line  to  Des  Moines,  pro-rates  with  the  Minneapolis  and  St. 
Louis,  the  two  forming  two  sides  of  a  triangular  haul.  An 
interesting  suggestion  of  the  volume  of  this  .indirect  routing 
is  afforded  by  the  statistics  of  merchandise  shipped  between 
American  points  which  passes  through  Canada  in  bond.^  The 
evidence  of  economic  waste  is  conclusive. 

A  common  form  of  wastefulness  in  transportation  arises 
when  freight  from  a  point  intermediate  between  two  termini  is 
hauled  to  either  one  by  way  of  the  other.  Such  cases  are 
scattered  throughout  our  railroad  history.  One  of  the  delegates 
to  the  Illinois  Constitutional  Convention  of  1870,  cites,  as  an 

1  Senate  (Elkins)  Committee,  1905,  III,  p.  1831. 

2  Only  once  compiled  in  detail.  U.  S.  Treasury  Dept.,  Circular  No.  37, 
1898.  The  volume  of  traffic  by  tons  between  points  in  designated  states 
by  way  of  Canada  was  as  follows: 

From  Illinois  to  California 11,800 

From  Illinois  to  New  Jersey 80,000 

From  Illinois  to  Pennsylvania 123,000 

From  Kenturky  to  Pennsylvania 1,005 

From  Kentucky  to  New  York 5,516 

From  Missouri  to  Pennsylvania 5,000 

From  Pennsylvania  to  Missouri 13,824 

From  New  York  to  Kentucky 3,357 

From  Now  York  to  Missouri 12,809 

From  New  York  to  Tennessee 009 

From  Ohio  to  Pennsylvania 26,801 

From  Pennsylvania  to  Ohio 5,251 

From  Ohio  to  New  York      .      .      .      .      ' 211,657 

i'rom  New  York  to  Ohio „      .      .      .      .  55,243 


PROBLEMS  OF  ROUTING  273 

instance  of  local  discrimination,  the  fact  that  lumber  from 
Chicago  to  Springfield,  IlUnois,  could  be  shipped  more  cheaply 
by  way  of  St.  Louis  than  by  the  direct  route.  ^  And  now  a 
generation  later,  it  appears  that  grain  from  Cannon  Falls, 
forty-nine  miles  south  of  St.  Paul  on  the  direct  line  to  Chicago, 
destined  for  Louisville,  Kentucky,  can  be  hauled  up  to  St.  Paul 
on  local  rates  and  thence  on  a  through  billing  to  destination, 
back  over  the  same  rails,  considerably  cheaper  than  by  sending 
it  as  it  should  properly  go.^  The  Hepburn  Committee  reveals 
shipments  from  Rochester,  New  York,  to  St.  Louis,  Minneapo- 
lis or  California,  all  rail,  on  a  combination  of  local  rates  to 
New  York  and  thence  to  destination.^  Presumably  the  freight 
was  hauled  three  hundred  miles  due  east  and  then  retraced 
the  same  distance;  as  New  York  freight  for  southern  Cali- 
fornia is  today  hauled  to  San  Francisco  by  the  Southern  Pa- 
cific and  then  perhaps  three  hundred  miles  back  over  the  same 
rails.  Even  if  the  rate  must  be  based  on  a  combination  of  low 
through  rates  and  higher  local  rates,  it  seems  a  waste  of  energy 
to  continue  the  five  or  six  hundred  miles  extra  haul.  Yet  the 
practice  is  common  in  the  entire  western  territory.  From 
New  York  to  Salt  Lake  City  by  way  of  San  Francisco  is  another 
instance  in  point.''  Of  course  a  short  haul  to  a  terminal  to 
enable  through  trains  to  be  made  up  presents  an  entirely 
different  problem  of  cost  from  the. abnormal  instances  above 
mentioned.^ 

Carriage  by  water  is  so  much  cheaper  and  as  compared  with 
land  transportation  is  subject  to  such  different  rate-governing 
principles,  that  it  deserves  separate  consideration.  Mere  dis- 
tance, as  has  already  been  said,  being  really  only  one  element 

1  Debates,  II,  p.  1646,  cited  in  University  of  Illinois  Studies,  March, 
1904,  p.  21. 

2  Senate  (Elkins)  Committee,  1905,  I,  pp.  32-34.  Cf.  also  10  I.C.C. 
Rep.,  650.     Another  good  instance  on  Arizona  is  in  16  Idem,  77. 

3  Page  2031. 

^  Senate  (Elkins)  Committee,  1905,  II,  p.  921. 
^  Cullom  Committee,  II,  p.  101. 
VOL.  I — 18 


274  RAILROADS 

in  the  determination  of  cost,  a  circuitous  water  route  may  in 
reality  be  more  economical  than  direct  carriage  overland.  Yet 
beyond  a  certain  point,  regard  being  paid  to  the  relative  cost 
per  mile  of  the  two  modes  of  transport,  water-borne  traffic  may 
entail  economic  wastes  not  incomparable  to  those  arising  in 
land  transportation.  In  international  trade,  entirely  confined 
to  vessel  carriage,  a  few  examples  will  suffice  for  illustration. 
Machinery  for  a  stamp  mill,  it  was  found,  could  be  shipped  from 
Chicago  to  San  Francisco  by  way  of  Shanghai,  China,  for 
fifteen  cents  per  hundredweight  less  than  by  way  of  the  econom- 
ically proper  route.  Were  the  goods  ever  really  sent  by  so 
indirect  a  route?  ^  It  would  appear  so  when  wheat  may 
profitably  be  carried  from  San  Francisco  to  Watertown,  Massa- 
chusetts, after  having  been  taken  to  Liverpool,  stored  there, 
reshipped  to  Boston,  thereafter,  even  paying  the  charges  of  a 
local  haul  of  nearly  ten  miles;  ^  or  when  shipments  from  Liver- 
pool to  New  York  may  be  made  via  Montreal  to  Chicago,  and 
thence  back  to  destination.*  I  am  credibly  informed  that 
shipments  of  the  American  Tobacco  Company  from  Louisville, 
Kentucky,  to  Japan  used  commonly  to  go  via  Boston.  Denver 
testimony  is  to  the  effect  that  machinery,  made  in  Colorado, 
shipped  to  Sydney,  Australia,  can  be  transported  via  Chicago 
for  one-half  the  rate  for  the  direct  shipment;  and  that  on 
similar  goods  even  Kansas. City  could  ship  by  the  carload  con- 
siderably cheaper  by  the  same  roundabout  route.  Conversely 
straw  matting  from  Yokohama  to  Denver  direct  must  pay 
$2.87  per  hundred  pounds;  while  if  shipped  to  the  Missouri 
river,  five  hundred  miles  east  of  Denver,  and  then  back,  the 
rate  is  only  $2.05.^ 

As  a  domestic  problem,  water  carriage  confined  to  our  own 
territory  has  greater  significance  in  the  present  inquiry.  Purely 
coastwise  traffic  conditions  are  peculiar  and  in  the  United 

1 10  I.C.C.  Rep.,  81. 

2  Senate  (Elkins)  Committee,  1905,  II,  p.  919. 

3  Ibid.,  p.  1624.  "  11  I.C.C.  Rep.,  508. 


PROBLEMS  OF  ROUTING  275 

States,  as  a  rule,  concern  either  the  South  Atlantic  seaports  or 
transcontinental  business.  As  to  the  first-named  class,  the 
volume  and  importance  of  the  traffic  is  immense.  Its  character 
may  be  indicated  by  a  quotation  from  a  railroad  man. 

"Now  a  great  deal  has  been  said,  chiefly  on  the  outside,  about  the 
Canadian  Pacific  Railway  seeking  by  its  long,  chcuitous  and  broken 
route  to  share  in  a  tonnage  as  against  more  direct  and  shorter  fines  all 
rail,  and  I  propose  to  show  to  you  gentlemen  that  not  only  have  we  a 
precedent  on  which  to  claim  differentials,  many  of  them,  and  that  we 
also  have  numerous  precedents  to  show  that  there  are  numerous  broken, 
circuitous  water  and  rail  fines  operating  all  over  the  country  that  are 
longer  and  more  circuitous  than  ours,  and  stiU  they  do  operate  with 
more  or  less  success.  ...  In  saying  this  I  do  not  wish  to  be  under- 
stood as  criticising  the  right  of  any  road  to  go  anj^^here,  even  wdth  a 
broken  and  circuitous  line,  to  seek  for  business,  so  long  as  they  are 
satisfied  that  taking  aU  the  circiunstances  into  account  such  business 
wiU  afford  them  some  smaU  measure  of  profit.  *  *  * 

"The  distance  by  the  Chesapeake  &  Ohio  Road,  Boston  to  New- 
port News,  is  544  miles  by  water;  Newport  News  to  Chicago,  1071 
miles,  total  1615  miles  from  Boston  to  Chicago,  against  1020  miles 
by  the  shortest  aU-rail  fine  from  Boston,  shomng  the  fine  via  Newport 
News,  58  per  cent,  longer.  The  distance  by  the  Chesapeake  and  Ohio 
from  New  York  to  NewT^ort  News  in  305  miles,  to  which  add  1071 
miles,  Ne^vport  News  to  Chicago,  total  1376  nnles,  against  the  shortest 
all-rail  fine  of  912  miles,  50.87  per  cent,  longer.  Again  the  distance 
between  Boston  and  Duluth  by  all-rail  is  1382  nnles,  against  2195 
miles  via  Newport  News  and  Chicago,  58.82  per  cent,  longer  by  the 
broken  route. 

"The  Southern  Pacific  Co.,  or  System  rather,  in  connection  with 
the  Morgan  line  steamers,  carries  business,  via  New  York,  New  Orleans 
and  Fort  Worth,  to  Utah  points  at  a  differential  rate.  The  distance 
from  New  York  to  Denver  via  water  to  New  Orleans  thence  rail  to 
Fort  Worth  is  3155  miles,  against  1940  miles  by  the  direct  all-rail  fine, 
showing  it  to  be  longer  via  New  Orleans  62.61  per  cent.^ 

Allowing  a  constructive  mileage  of  one-third  for  the  last 
named  water  haul,^  many  of  these  even  up  fairly  well  with  the 
all-rail  carriage;   although  a  route  from  New  York  to  Kansas 

'  Question  of  Canadian  Pacific  Freight  Differentials,  Hearings,  etc., 
Oct.  12,  1898,  p.  17.  Privately  printed.  See  also  pp.  72  and  116  on  the 
same  point. 

2  Record  Cincinnati  Freight  Bureau  case,  II,  p.  306. 


276  RAILROADS 

City  by  way  of  Savannah,  Georgia,  would  appear  to  be  an  ex- 
treme case,  owing  to  the  relatively  long  haul  by  rail.^  The 
increasing  importance  of  Galveston  and  the  necessity  of  a  back 
haul  to  compensate  for  export  business  make  it  possible  for 
that  city  to  engage  in  business  between  New  York  and  Kansas 
City,  although  the  roundabout  route  is  two  and  one-half  times 
as  long  as  the  direct  one.^  As  compared  with  these  examples, 
it  is  no  wonder  that  the  competition  for  New  York-Nashville  or 
New  England-Chattanooga  business  by  way  of  Savannah, 
Mobile,  or  Brunswick,  Georgia,  is  so  bitter.  The  roundabout 
traffic  thus  reaches  around  by  the  southern  ports  and  nearly 
up  again  to  the  Ohio  river. ^ 

The  second  great  class  of  broken  rail  and  water  shipments 
consists  of  transcontinental  business.  Goods  from  New  York 
to  San  Francisco  commonly  go  by  way  of  New  Orleans  or 
Galveston,^  as  well  as  by  Canadian  ports  and  routes.^  In  the 
opposite  direction,  goods  are  carried  about  1000  miles  by  water 
to  Seattle  or  Vancouver  before  commencing  the  journey  east. 
But  more  important,  as  illustrating  this  point,  is  the  traffic  from 
the  Central  West  which  reaches  the  Pacific  coast  by  way  of 
Atlantic  seaports.  As  far  west  as  the  Missouri,  the  actual  com- 
petition of  the  trunk  lines  on  Cafifornia  business  has  since  1894  ^ 
brought  about  the  condition  of  the  "blanket"  or  "postage 
stamp"  rate.  The  same  competitive  conditions  which  open  up 
Denver  or  Kansas  City  to  New  York  shippers  by  way  of  New 
Orleans  or  Galveston,  enable  the  Southern  Pacific  Railroad  or 

1  Hearings,  Question  of  Canadian  Pacific  Freight  Differentials,  Oct.  12, 
1898,  p.  .55. 

2  U.  S.  Industrial  Commission,  IV,  p.  134. 

3  55th  Cong.,  1st  sess.,  Sen.  Doc.  No.  39,  p.  88. 

■•  By  water  from  New  York,  1800  miles  to  New  Orleans,  with  2489  miles 
by  rail.  Or  to  Galveston  2300  miles  with  2666  miles  by  rail,  a  total  of 
4966  miles.  The  direct  line,  all  rail,  is  about  3300  miles.  Allowing  con- 
structive mileage  of  3  to  1  for  water  carriage,  they  are  far  from  equal. 

^  Texas  cotton  bound  for  Yokohama  by  way  of  Seattle. 

^  On  these  matters  the  Record  of  the  Business  Men's  League  of  St. 
Louis  case  before  the  Interstate  Commerce  Commission,  9  Int.  Com.  Rep., 
318;  and  the  Hearings  on  Canadian  Pacific  Differentials  are  illuminating. 


PROBLEMS  OF   ROUTING  277 

Cape  Horn  routes  to  solicit  California  shipments  in  western 
territory  to  be  hauled  back  to  New  York,  and  thence  by  water 
all  or  part  of  the  way  to  destination.  How  important  this 
potential  competition  is  —  that  is  to  say,  what  proportion  of 
the  traffic  is  interchanged  by  this  route  —  cannot  readily  be 
determined. 

Transportation  over  undue  distances  —  the  carriage  of 
coals  to  Newcastle  in  exchange  for  cotton  piece  goods  hauled 
to  Lancashire  —  as  a  product  of  keen  commercial  competition 
may  involve  both  a  waste  of  energy  and  an  enhancement  of 
prices  in  a  manner  seldom  appreciated.  The  transportation  of 
goods  great  distances  at  low  rates,  while  economically  justifiable 
in  opening  up  new  channels  of  business,  becomes  wasteful  the 
moment  such  carriage,  instead  of  creating  new  business,  merely 
brings  about  an  exchange  between  widely  separated  markets,  or 
an  invasion  of  fields  naturally  tributary  to  other  centres.  The 
wider  the  market,  the  greater  is  the  chance  of  the  most  efficient 
production  at  the  lowest  cost.  The  analogy  at  this  point  to 
the  problem  of  protective  tariff  legislation  is  obvious.  For  a 
country  to  dispose  of  its  surplus  products  abroad  by  cutting 
prices  may  not  involve  economic  loss;  but  for  two  countries 
to  be  simultaneously  engaged  in  "dumping"  their  products 
into  each  other's  markets  is  quite  a  different  matter.  In  trans- 
portation such  cases  arise  whenever  a  community,  producing 
a  surplus  of  a  given  commodity,  supplies  itself,  nevertheless, 
with  that  same  commodity  from  a  distant  market.  It  may 
not  be  a  just  grievance  that  Iowa,  a  great  cattle  raising  state, 
should  be  forced  to  procure  her  dressed  meats  in  Chicago  or 
Omaha;  ^  for  in  this  case  some  degree  of  manufacture  has 
ensued  in  these  highly  specialized  centres.  But  the  practice 
is  less  defensible  where  the  identical  product  is  redistributed 
after  long  carriage  to  and  from  a  distant  point.  Arkansas  is  a 
great  fruit  raising  region;  yet  so  cheap  is  transportation  that 
dried  fruits,  perhaps  of  its  own  growing,  are  distributed  by 
1  Senate  (Elkins)  Committee,  1905,  III,  p.  1830. 


278  RAILROADS 

wholesale  grocers  in  Chicago  throughout  its  territory.  The 
privilege  of  selling  rice  in  the  rice-growing  states  from  Chicago 
is,  however,  denied  by  the  Southern  Railway  Association. ^ 
An  illuminating  example  of  similar  character  occurs  in  the 
Southern  cotton  manufacture,  as  described  by  a  Chicago 
jobber: 

"Right  in  North  Carolina  there  is  one  mill  shipping  60  carloads  of 
goods  to  Chicago  in  a  season,  and  a  great  many  of  these  same  goods 
are  brought  right  back  to  this  very  section.  ...  I  might  add  that 
when  many  of  these  heavy  cotton  goods  made  in  this  southeastern  sec- 
tion are  shipped  both  to  New  York  and  Chicago  and  then  sold  and  re- 
shipped  South,  they  pay  15  cents  to  20  cents  per  hundred  less  each  way 
to  New  York  and  back  than  via  Chicago.  This  doubles  up  the  handi- 
cap against  which  Chicago  is  obliged  to  contend  and  renders  the  un- 
fairness still  more  burdensome."  - 

The  overweening  desire  of  the  large  centres  to  enter  every 
market  is  well  exemphfied  by  recent  testimony  of  the  Chicago 
jobbers.^ 

"  A  few  years  later,  when  the  railroads  established  the  relative  rates  of 
freight  between  New  York  and  Philadelphia  and  the  Southeast,  and  St. 
Louis,  Cincinnati  and  Chicago  and  the  Southeast,  giving  the  former 
the  sales  of  merchandise  and  the  latter  the  furnishing  of  food  products, 
the  hardware  consumed  in  this  country  was  manufactured  in  England. 
At  that  time  we,  in  Chicago,  felt  that  we  were  going  beyond  the  con- 
fines of  our  legitimate  territory  when  we  diffidently  asked  the  mer- 
chants in  western  Indiana  to  buy  their  goods  in  our  market.  Today, 
a  very  considerable  percentage  of  the  hardware  used  in  the  United 
States  is  manufactured  in  the  Middle  West,  and  we  are  profitably 
selling  general  hardware  through  a  corps  of  travelling  salesmen  in  New 
York,  Pennsylvania  and  West  Virginia,  and  special  lines  in  New 
England. 

"What  we  claim  is  that  we  should  not  have  our  territory  stopped 
at  the  Ohio  river  by  any  act  of  yours.  It  is  not  stopped,  gentlemen, 
by  any  other  river  in  America.  It  is  not  stopped  by  the  greatest  river, 
the  Mississippi.  It  is  not  stopped  by  the  far  greater  river,  the  Missouri. 
It  is  not  stopped  by  the  Arkansas;  it  is  not  stopped  by  the  Rio  Grande. 

1  Record  before  the  I.C.C.;  Cincinnati  Freight  Bureau  case,  I,  p.  166. 

2  Senate  (Elkins)  Committee,  lOOf),  III,  pp.  2.540-254L 

3  Senate  (Elkins)  Committee,  1905,  III,  pp.  2538  and  2550. 


PROBLEMS  OF  ROUTING  279 

It  is  not  stopped  even  by  the  Columbia;  and,  even  in  the  grocety  busi- 
ness, it  is  not  stopped  by  the  Hudson.  There  are  Chicago  houses  that 
are  seUing  goods  in  New  York  city,  groceries  that  they  manufacture 
themselves.  Mr.  Sprague's  own  house  sells  goods  in  New  York  city, 
and  Chicago  is  selhng  groceries  in  New  England.  As  I  say,  even  the 
Hudson  river  doesn't  stop  them." 

All  this  record  implies  progressiveness,  energy,  and  ambi- 
tion on  the  part  of  both  business  men  and  traffic  officers.  Noth- 
ing is  more  remarkable  in  American  commerce  than  its  freedom 
from  restraints.  Elasticity  and  quick  adaptation  to  the  ex- 
igencies of  business  are  peculiarities  of  American  railroad 
operation.  This  is  due  to  the  progressiveness  of  our  railway 
managers  in  seeking  constantly  to  develop  new  territory  and 
build  up  business.  The  strongest  contrast  between  Europe 
and  the  United  States  lies  in  this  fact.  European  railroads 
take  business  as  they  find  it.  Our  railroads  make  it.  Far 
be  it  from  me  to  minimize  the  service  rendered  in  American 
progress.  And  yet  there  are  reasonable  limits  to  all  good  things. 
We  ought  to  reckon  the  price  which  must  be  paid  for  this 
freedom  of  trade. 

One  further  aspect  of  economic  waste  may  be  mentioned, 
especially  as  bearing  upon  Federal  regulation  so  far  as  it 
affects  carload  ratings  and  commercial  rivalry  between  remote 
middlemen  in  the  large  cities  and  provincial  jobbing  interests. 
The  actual  cost  of  handling  small  shipments  being  about  one- 
half  that  of  carriage  by  carloads,  the  cheapest  way  in  which  to 
supply,  let  us  say,  the  Pacific  slope  or  Texas  territory,  is  to 
encourage  the  local  jobber  who  ships  by  carload  over  the  long 
haul.  For,  obviously,  distribution  by  less-than- carload  lots 
from  New  York,  or  even  Chicago  direct,  direct  to  the  cross- 
road store,  is  bound  to  be  a  wasteful  process  by  comparison.^ 
But  in  addition  there  are  also,  of  course,  the  social  factors  to  be 
considered,  which  are  of  even  greater  weight. 

1  Briefly  discussed  in  the  St.  Louis  Business  Men's  League  case:  9  Int. 
Com.  Rep.,  318. 


280  RAILROADS 

The  causes  of  economic  waste  in  transportation  are  various. 
Not  less  than  six  may  be  distinguished.  These  are:  (1)  con- 
gestion of  the  direct  route;  (2)  rate  cutting  by  the  weak  circu- 
itous hne;  (3)  pro-rating  practices  in  division  of  joint  through 
rates;  (4)  desire  for  back-loading  of  empty  cars;  (5)  strategic 
considerations  concerning  interchange  of  traffic  with  connec- 
tions; and  (6)  attempts  to  secure  or  hold  shippers  in  con- 
tested markets.  These  merit  consideration  separately  in  some 
detail. 

Congestion  of  traffic  upon  the  direct  line  is  a  rare  condition 
in  our  American  experience.  Few  of  our  railways  are  over- 
crowded with  business.  Their  equipment  may  be  overtaxed, 
but  their  rails  are  seldom  worked  to  the  utmost.  Yet  the 
phenomenal  development  of  trunk  line  business  since  1897 
sometimes  makes  delivery  so  slow  and  uncertain  that  shippers 
prefer  to  patronize  railways  less  advantageously  located,  even 
at  the  same  rates.  The  congestion  on  the  main  stem  of  the 
Pennsylvania  railway  between  Pittsburg  and  Philadelphia  is 
a  case  in  point. 

Special  rates  or  rebates  often  divert  traffic.  The  weak  lines, 
in  that  particular  business,  are  persistently^  in  the  field  and 
can  secure  tonnage  only  by  means  of  concessions  from  what 
may  be  called  the  standard  or  normal  rate.  The  differential 
rate  is  an  outgrowth  of  this  condition.  The  present  controversy 
over  the  right  of  the  initial  line  in  transcontinental  business  to 
route  the  freight  at  will  involves  such  practices.  The  carriers 
insist  that  they  can  stop  the  evil  only  by  the  exercise  of  choice 
in  their  connections.  An  interesting  recent  example  is  found 
in  the  Elkins  Committee  testimony.  It  appears  that  lumber 
from  points  in  Mississippi  destined  for  Cleveland  instead  of 
going  by  the  proper  Ohio  river  gateways  was  diverted  to  East 
St.  Louis.  The  operation  was  concealed  by  billing  it  to  ob- 
scure points,  —  Jewett,  111.,  near  East  St.  Louis,  and  Rochester, 
Ohio,  —  and  there  issuing  a  new  bill  of  lading  to  destination : 


PROBLEMS  OF  ROUTING  281 

Senator  Dolliver.  .  And  these  people  carry-  it  up  to  this  little 
station  near  St.  Louis  and  then  transfer  it  to  another  station  near 
Cleveland? 

Mr.  Robinson.  Oh,  no;  to  any  point  on  the  Central  Traffic 
Association  territory.     In  other  words,  it  may  go  to  Cleveland. 

Senator  Dolliver.     Why  do  they  bill  it  to  Rochester? 

Mr.  Robinson.  In  order  to  get  the  benefit  of  keeping  it  in  transit 
fifteen  days  without  any  extra  cost,  first. 

Senator  Dolliver.  I  do  not  see  how  that  would  affect  the 
question  of  billing  it  to  Rochester. 

Mr.  Robinson.  Because  that  enables  the  wholesaler  to  have 
fifteen  days  extra  time  in  which  to  sell  the  lumber. 

The  Chairman.  Why  haul  it  all  around  the  'country  and  then 
reduce  the  rate  on  that  long  haul? 

Mr.  Robinson.  In  order  that  roads  that  are  not  entitled  naturally 
to  this  traffic  may  by  this  process  get  the  traffic. 

Senator  Dolliver.  Wliat  roads  from  Mississippi  to  East  St. 
Louis? 

Mr.  Robinson.  Any  of  the  trunlc  lines  —  the  Illinois  Central, 
the  Louisville  or  the  Southern  Railway  lines.  The  roads  in  Mississippi 
south  of  the  river  are  not  parties  to  this  arrangement,  you  understand. 
In  fact,  as  fast  as  they  find  it  out  they  break  it  up,  or  try  to.  They  do 
not  want  their  traffic  diverted. 

Senator  Kean.  Does  it  not  come  down  to  this,  that  some  road  is 
trying  to  cheat  another  on  the  use  of  its  cars? 

Mr.  Robinson.  Not  only  that,  but  it  is  trying  to  get  traffic  that 
does  not  belong  to  it.^ 

Wherever  a  large  volume  of  traffic  is  moving  by  an  unnatural 
route,  the  first  explanation  which  arises  therefore  is  that  rebates 
or  rate-cutting  are  taking  place.^ 

A  third  cause  of  diversion  of  traffic  is  akin  to  the  second; 
and  concerns  the  practices  in  pro-rating.  Much  circuitous 
transportation  is  due  to  the  existence  of  independent  trans- 
verse lines  of  railway  which  may  participate  in  the  traffic  only 
on  condition  that  it  move  by  an  indirect  route.  This  situation 
is  best  described  by  reference  to  the  following  diagram.  Let 
us  suppose  traffic  to  be  moving  by  two  routes  passing  through 

^  Testimony,  III,  p.  2495  et  seq. 

^  The  Report  of  the  U.  S.  Commissioner  of  Corporations  on  the  Trans- 
portation of  Petroleum,  1906,  affords  admirable  examples.  Fide,  pp.  5, 
7,  14  and  the  map  at  p.  256. 


282 


RAILROADS 


points  B  and  C,  and  converging  on  A,  which  last-named  point 
might  be  Chicago,  St.  Louis,  New  York  or  any  other  railroad 
centre.  Cutting  these  two  converging  lines  of  railway,  we  will 
suppose  a  tranverse  line  passing  through  B  and  C.  Obviously 
the  proper  function  of  this  railway  is  as  a  feeder  for  the  through 
lines,  each  being  entitled  to  traffic  up  to  the  half-way  point,  D. 
But  over  and  above  serving  as  a  mere  branch,  this  road,  desir- 
ous of  extending  its  business,  has  a  powerful  incentive  to  extend 


operations.  The  longer  the  tranverse  haul,  the  greater  be- 
comes its  pro-rating  division  of  the  through  rate  with  the  main 
fine.  Traffic  from"  C  is  of  no  profit  to  the  tranverse  road  so 
long  as  it  is  hauled  directly  to  A.  But  if  hauled  from  C  to  the 
same  destination  by  way  of  B,  the  profit  may  be  enhanced  in 
two  ways.  In  the  first  place  the  pro-rating  distance  is  greater; 
and  secondly,  such  traffic  from  C  not  being  naturally  tributary 
to  the  main  fine  B  A  but  merely  a  surplus  freight  to  be  added 
to  that  already  in  hand,  the  main  line  A  B  is  open  to  temptation 
to  shrink  its  usual  proportion  of  the  through  rate  in  order  to 
secure  the  extra  business.  This  same  motive  may  on  proper 
solicitation  induce  the  other  main  line  C  A  to  accept  traffic 
from  B  and  its  vicinity.     The  result  is  a  greatly  enhanced 


PROBLEMS  OF  ROUTING  283 

profit  to  the  cross  line  and  circuitous  carriage  of  the  goods  in 
both  directions  around  two  sides  of  a  triangle.  Only  recently 
in  a  case  in  Texas  the  Interstate  Commerce  Commission  found 
that  two  roads  thus  converging  on  a  common  point  were  each 
losing  to  the  other  traffic  which  rightfully  was  tributary  to  its 
own  line.  In  a  recent  case,  ninety-nine  per  cent,  of  the  business 
from  Chatham  to  New  York  was  moving  over  a  route  249  miles 
long,  when  it  might  have  gone  directly  only  144  miles,  by  pro- 
rating with  another  road.^  Our  illustrative  examples  are  not 
fanciful  in  any  degree.^ 

This  roundabout  carriage  becomes  of  course  increasingly 
wasteful  in  proportion  to  the  width  of  angle  between  the  main 
lines  converging  on  the  common  point.  And  several  cases  indi- 
cate that  in  extreme  instances  the  two  main  lines  may  converge 
on  a  common  point  from  exactly  opposite  directions,  while  the 
transverse  or  secondary  road  or  series  of  roads  forms  a  wide  and 
roundabout  detour.  The  well  known  Pittsburg- Youngstown 
case,  cited  in  the  original  Louisville  &  Nashville  decision  in 
1887,  serves  as  illustration.  The  Pennsylvania  was  competing 
from  Pittsburg  directly  eastbound  to  New  York  with  certain 
feeders  of  the  New  York  Central  lines  which  took  out  traffic 
bound  for  the  same  destination  but  leaving  Pittsburg  west- 
bound.^ Other  instances  of  the  same  phenomenon  occur  at 
Chattanooga,  where  freight  for  New  York  may  leave  either 
northward  or  southward,  at  Kansas  City  and  in  fact  at  almost 
any  important  inland  centre. 

Another  extreme  form  may  arise  even  in  the  competition 
between  two  parallel  trunk  lines  cut  transversely  by  two  inde- 
pendent cross  roads.  One  of  these  latter  may  induce  traffic  to 
desert  the  direct  route,  to  cut  across  to  the  other  trunk  line, 
to  move  over  that  some  distance  and  then  to  be  hauled  back 


1  23  I.C.C.  Rep.,  263. 

"  Similar  triangular  cross-road  competition  is  in  evidence  in  the  Wichita, 
Kan.,  cases  on  export  grain,  p.  232,  supra. 

« 1  I.C.C.  Rep.,  32;  and  Industrial  Commission,  XIX,  p.  442. 


284  RAILROADS 

again  to  a  point  on  the  first  main  line  where  it  may  find  a  "cut" 
rate  to  destination.  Grain  sometimes  used  Hterally  to  meander 
to  the  seaboard  in  the  days  of  active  competition  between  the 
trunk  fines.  Wheat  from  Iowa  and  northern  Ilhnois  finaUy 
reached  Portland,  Maine,  by  way  of  Cincinnati  in  this  manner, 
with  a  superfluous  carriage  of  from  250  to  350  miles: 

"Starting  within  90  miles  of  Chicago,  though  billed  due  northeast  to 
Portland,  wheat  has  travelled  first  97  miles  due  southwest  to  avail  of 
the  connection  of  the  Baltimore  and  Ohio  Railroad  for  Cincinnati,  and 
thence  north  to  Detroit  Junction,  a  total  of  716  miles  to  reach  the 
latter  point  and  save  5  cents  in  freight.  The  direct  haul  through 
Chicago  would  have  been  340  miles  less,  or  a  total  of  376  miles  only."  ^ 

Another  witness  describes  the  route  as  follows: 

Property  billed  for  Portland,  Me.,  started  90  miles  below  Chicago, 
although  Chicago  is  on  a  direct  line,  and  took  a  southeasterly  course, 
then  to  Springfield,  from  Springfield  to  Flora,  then  to  Cincinnati, 
and  then  over  the  Hamilton  and  Dayton  system  to  Detroit,  there  to 
take  the  Grand  Trunk  road  to  Portland.  This  was  owing  to  the  billing 
system  adhered  to  here  with  great  tenacity.  Property  ran  around 
thi'ee  sides  of  a  square,  and  I  lost  money  on  some  of  that  property.^ 

This  ruinous  diversion  of  freight  seems  to  have  been  depend- 
ent upon  the  existence  of  active  competition  at  Detroit  and 
ceased  when  the  Grand  Trunk  came  to  an  agreement  with  the 
American  lines.  But  there  can  be  no  doubt  that  wherever  these 
cross  lines  exist  there  is  a  strong  tendency  toward  diversion. 
In  the  recent  hearings  of  the  Senate  Committee  on  Interstate 
Commerce  on  railway  rate  regulation,  a  railroad  witness  again 
describes  the  operation: 

Mr.  ViNiNG.  Well,  for  instance,  take  the  time  when  I  was  on  the 
Grand  Rapids  and  Indiana  Railroad.  Its  connection  at  the  south  was 
at  Fort  Wayne,  with  the  Pittsburg,  Fort  Wayne  and  Chicago  Road.  We 
took  lumber  out  of  Michigan  and  wanted  to  send  it  east.    We  had  to 

'  Statements  taken  before  the  Committee  on  Interstate  Commerce  of 
the  U.  S.  Senate  with  respect  to  the  Transportation  Interests  of  the  U.  S. 
and  Canada.  Washington,  1890,  p.  616.  Cf.  chap.  X,  p.  363,  injra; 
also  the  Wichita  cases,  in  chap.  VII,  p.  232,  supra. 

^Ibid.,  p.  631. 


PROBLEMS  OF  ROUTING  285 

compete  w-ith  lines  that  went  by  way  of  Detroit,  that  went  perhaps 
tlirough  Canada  and  that  in  some  cases  were  shorter.  Of  course,  if 
we  wanted  to  send  lumber  from  Grand  Rapids  to  New  York  we  had  to 
make  at  least  as  low  a  rate  as  was  made  by  other  lines  leading  from 
Grand  Rapids  to  New  York.  That  rate  might  be  just  the  same  from 
Fort  WajTie  as  from  Grand  Rapids,  so  that  we  could  not  get  any  more 
than  the  low  rate  from  Fort  Wajoie.  We  had  to  go  in  that  case  to 
the  Pittsburg,  Fort  Wayne  and  Chicago  Railway  and  say:  "Here  are 
so  many  carloads  of  lumber,  or  so  much  lumber,  at  Grand  Rapids,  a 
part  of  which  could  be  shipped  to  New  York  if  we  had  through  rates 
that  would  enable  us  to  move  it.  These  other  lines  are  carrjdng  it  for 
25  cents  a  hmidred  pounds  to  New  York.  You  join  us  in  a  through 
rate  of  25  cents  and  we  can  give  you  some  of  that  business."  .  .  . 
But  if  I  were  with  a  short  line  and  wanted  to  negotiate  with  a  long  one, 
I  should  try  to  put  my  case  just  as  strongly  as  possible  before  the  long 
line.  I  should  say  to  them:  "We  can  not  take  5  per  cent,  of  a  rate  of 
25  cents.  It  woiild  not  pay  us.  You  know  that;  you  can  see  that"; 
and  they,  as  business  men,  would  admit  it.  "Well,"  I  would  say, 
"give  us  5  cents  a  hundred  pounds  and  we  will  bring  the  business  to 
you,  and  if  you  do  not,  we  can  not  afford  to  do  it." 

Senator  Cullom.  I  think  in  some  instances  they  have  stated 
before  us  that  they  gave  25  per  cent. 

Mr.  ViNiNG.     They  might.^ 

Whenever  the  cross  road  was  financially  embarrassed,  the  ten- 
dency to  diversion  was  increased.  For  then,  of  course,  having 
repudiated  fixed  charges,  the  cross  line  could  accept  almost  any 
rate  as  better  than  the  loss  of  the  traffic.  And  that  this  was  in 
the  past  almost  a  chronic  condition  in  western  trunk  line  terri- 
tory appears  from  the  fact  that  eighteen  out  of  the  twenty-two 
roads  cutting  the  Illinois  Central  between  Chicago  and  Cairo 
have  been  in  the  hands  of  receivers  since  1874.^ 

It  not  infrequently  happens  that  the  initial  railroad  may  en- 
tirely control  a  roundabout  route,  whereas  shipments  by  the 
most  direct  line  necessitate  a  division  of  the  joint  rate  with 
other  companies.  In  such  a  case  the  initial  line  will  naturally 
favor  the  indirect  route,  at  the  risk  of  economic  loss  to  the 
community   and   even  to   its   o\\ti   shippers.     An   interesting 

1  Senate  (Elkins)  Committee,  1905,  II,  p.  1706. 

*  Quoted  from  Acworth,  55th  Cong.,  1st  sess.,.  Sen.  doc.  39,  p.  33. 


286  RAILROADS 

illustration  is  afforded  by  a  complaint  of  wheat  growers  at  Ritz- 
ville  in  the  state  of  Washington  concerning  rates  to  Portland, 
Oregon.^  By  direct  line  with  low  grades  along  the  Columbia 
river  the  distance  was  311  miles.  This  was  composed  of  sev- 
eral independent  but  connecting  links.  The  Northern  Pacific 
on  the  other  hand  had  a  line  of  its  own,  480  miles  long,  which 
moreover  crossed  two  mountain  ranges  with  heavy  grades.  It 
based  its  charges  upon  the  cost  of  service  by  this  roundabout 
and  expensive  fine;  and  insisted  upon  its  right  to  the  traffic 
despite  the  wishes  of  the  shippers.  The  Commission  upheld 
the  shippers'  contention  for  the  right  to  have  their  products 
carried  to  market  in  the  most  efficient  manner.^  Another  in- 
stance on  the  Illinois  Central  is  suggestive,  concerning  ship- 
ments from  Panola,  Illinois,  to  Peoria,  a  distance  of  about  forty 
miles  by  the  shortest  line  of  connecting  roads.  Yet  the  Illinois 
Central  having  a  line  of  its  own  via  Clinton  and  Lincoln  trans- 
ported goods  round  three  sides  of  a  rectangle,  a  distance  of  109 
miles,  presumably  in  order  to  avoid  a  pro-rating  division  of  the 
through  rate.^  Of  course  elements  of  operating  cost  enter 
sometimes,  as  in  the  case  of  back-loading;  ^  but  in  the  main, 
the  pro-rating  consideration  rules. 

Rebates  may  or  may  not  be  given  in  connection  with  circuit- 
ous routing.  Sometimes  the  same  result  may  be  obtained  when 
one  carrier  merely  shrinks  its  proportion  of  a  joint  through  rate, 
leaving  the  total  charge  to  the  shipper  unaffected.  Of  course  it 
goes  without  saying  that  an  implication  of  improper  manipula- 
tion of  rates  does  not  always  follow  the  diversion  of  freight  from 
a  direct  line.  The  rate  may  be  the  same  by  several  competitive 
routes,  shipments  going  as  a  reward  for  energy,  persistency,  or 
personality  of  the  agent.  A  recent  case,  concerning  rates  on 
lumber  from  Sheridan,  Indiana,  to  New  York  illustrates  this 


^  Newlands  v.  Nor.  Pac.  R.  R.  Co.;  6  Int.  Com.  Rep.,  131. 
2  Cf.  the  case  of  the  C.  H.  &  D.  R.  R.  on  p.  271,  supra. 
'  Record,  Ilhnois  Railroad  Commission,  concerning  Reasonable  Maxi- 
mum Rates,  1905,  p.  165.  *  Cf.  p.  287,  infra. 


PROBLEMS  OF  ROUTING  287 

point. ^  Sheridan  is  twenty-eight  miles  north  of  Indianapolis 
on  the  Monon  road.     Quoting  from  the  decision: 

"In  the  division  of  joint  through  rates  on  percentages  based  on  mile- 
age, the  defendant  line  naturally  prefers  arrangements  with  comiections 
giving  it  the  longest  haul  and  largest  percentages.  Therefore,  it  carries 
this  freight  at  rates  based  on  a  carriage  through  Indianapolis  by  a 
direct  line  eastward,  while  in  fact  it  carries  it  in  an  opposite  direction 
north  and  west  by  a  longer  route,  the  reduced  ton  mileage  being 
accepted  to  secure  the  trafhc." 

The  Iowa  Central,  cutting  across  the  four  main  lines  between 
Chicago  and  Omaha,  derives  a  large  revenue  from  such  diver- 
sion. Coal  from  Peoria  west,  instead  of  moving  by  the 
shortest  line  to  Omaha,  is  hauled  across  the  first  three  to  a 
connection  with  the  devious  Great  Western  line.-  The  motive 
is  obvious. 

A  fourth  cause  of  diversion  of  traffic  has  to  do  rather  with 
the  operating  than  the  traffic  department.  An  inequality  of 
tonnage  in  opposite  directions  may  make  it  expedient  to  solicit 
business  for  the  sake  of  a  back  load.  The  Canadian  Pacific 
may  engage  in  San  Francisco-Omaha  business  by  way  of  Win- 
nipeg, because  of  the  scarcity  of  tonnage  east  bound.  The 
traffic  to  and  from  the  southeastern  states  is  quite  uneven  in 
volume.  The  preponderance  of  bulky  freight  is  north  bound 
to  the  New  England  centres  of  cotton  and  other  manufacture; 
while  from  the  western  cities,  the  greater  volume  of  traffic 
is  south  bound,  consisting  of  agricultural  staples  and  food 
stuffs.  To  equalize  this  traffic  it  may  often  be  desirable  to 
secure  the  most  roundabout  business.  A  disturbing  element  of 
this  sort  in  the  southern  field  has  always  to  be  reckoned  with. 
A  good  illustration  elsewhere  occurs  in  the  well  known  St. 
Cloud  case.^  The  Northern  Pacific  accepted  tonnage  for  a  most 
circuitous  haul  to  Duluth,  but  seems  to  have  done  so  largely  in 
order  to  provide  lading  for  a  preponderance  of  "empties."     In 

1  10  I.C.C.  Rep.,  29.  ^  Boston  Transcript,  Oct.  14,  1905. 

'  8  Int.  Com.  Rep.,  346;  reprinted  in  our  Railway  Problems,  chap.  XI. 


288  RAILROADS 

this  case  it  did  not  lower  the  normal  rate  but  accepted  it  for  a 
much  longer  haul. 

Not  unlike  the  preceding  cause,  also,  is  a  fifth,  the  desire  to 
be  in  position  to  interchange  traffic  on  terms  of  equality  with 
powerful  connections.  Mr.  Bowes,  traffic  manager  of  the 
Illinois  Central,  justifying  the  participation  of  this  road  in 
Chicago-San  Francisco  business  by  way  of  New  Orleans,  well 
stated  it  as  follows:  ^ 

"Of  course  the  Southern  Pacific  Railroad,  as  you  gentlemen  know, 
originate  and  control  a  very  large  traffic,  which  they  can  deliver  at 
various  junctions;  at  New  Orleans,  where  they  have  their  long  haul  to 
the  Missouri  river,  and  we  naturally  want  some  of  that  business,  a 
long  haul  traffic  to  New  Orleans,  and  in  giving  it  to  them  we  place 
them  under  obligations  to  reciprocate  and  give  us  some  traffic.  That 
is  one  of  the  things  that  occurs  to  a  railroad  man  as  to  increasing  the 
volume  and  value  of  his  traffic  for  the  benefit  of  his  company." 

A  sixth  and  final  reason  for  diversion  of  traffic  from  the 
direct  line  may  be  partly  sentimental,  but  none  the  less  signifi- 
cant. It  concerns  the  question  of  competition  at  abnormal 
distances.  We  may  cite  two  railroad  witnesses,  who  aptly 
describe  the  situation,  "We  can  haul  traffic  in  competition, 
and  we  frequently  do,  as  I  stated,  at  less  than  cost,  or  nearly  so, 
in  order  to  hold  the  traffic  and  our  patrons  in  certain  territory 
—  Kansas  City  for  instance  —  but  we  do  not  like  to  do  it."  ^ 
Or  again,  "  The  Charleston  freight  is  not  legitimately  ours.  .  .  . 
We  make  on  these  through  rates  from  Chicago  to  Charleston, 
for  instance,  scarcely  anything.  But  it  is  an  outpost.  We  must 
maintain  that  or  have  our  territory  further  invaded."  ^  In 
other  words,  the  circuitous  or  over-long  distance  haul  is  a 
natural  though  regrettable  outcome  of  railroad  competition. 

What  are  the  effects  of  this  American  practice  of  unduly 
disregarding  distance  as  a  factor  in  transportation?    Not  less 

»  Senate  (Elkins)  Committee,  1905,  IV,  p.  2850. 

2  President  Ramsey  of  the  Wabash ;  Senate  (Elkins)  Committee,  1905, 
III,  p.  1971.  2  Windom  Committee,  II,  p.  796. 


PROBLEMS  OF  ROUTING  289 

than  five  deserve  separate  consideration  in  some  detail.  It 
inordinately  swells  the  volume  of  ton-mileage;  it  dilutes  the 
ton-mile  revenue;  it  produces  rigidity  of  industrial  conditions; 
it  stimulates  centralization  both  of  population  and  of  industry, 
and  it  is  a  tax  upon  American  production. 

One  cannot  fail  to  be  impressed  with  the  phenomenal  groTN'th 
of  transportation  in  the  United  States,  especially  in  recent 
years.  It  appears  as  if  its  volume  increased  more  nearly  as 
the  square  of  population  than  in  direct  proportion  to  it.^ 
But  do  these  figures  represent  all  that  they  purport  to  show? 
Every  ton  of  freight  which  moves  from  Chicago  to  San  Fran- 
cisco over  a  line  one  thousand  miles  too  long  adds  1000  ton 
miles  to  swell  a  fictitious  total.  Every  carload  of  cotton  goods 
hauled  up  to  Chicago  to  be  redistributed  thence  in  the  original 
territory  and  every  ton  of  groceries  or  agricultural  machinery 
exchanged  between  two  regions  wdth  adequate  facilities  for  pro- 
duction of  like  standard  goods  contribute  to  the  same  end.  How 
large  a  proportion  of  this  marvellous  growth  of  ton  mileage 
these  economic  wastes  contribute  can  never  be  determined 
with  certainty.  That  their  aggregate  is  considerable  cannot 
be  questioned. 

These  practices  must  considerably  dilute  the  returns  per 
mile  for  service  rendered  by  American  carriers  —  in  even  greater 
degree  than  they  enhance  the  apparent  volume  of  transporta- 
tion. Long-distance  rates  must  always  represent  a  low  revenue 
per  ton  mile,  owing  to  the  fixed  maximum  for  all  distances 
determined  by  what  the  traffic  will  bear.  Furniture  made  in 
North  Carolina  for  California  consumption  ^  cannot  be  sold 
there  in  competition  above  a  certain  price.  The  greater  the 
distance  into  which  the  possible  margin  of  profit  is  divided,  the 
less  per  mile  must  be  the  revenue  left  for  the  carrier.  Yet  this 
is  not  all.  Such  would  be  true  of  simply  over-long  distance 
carriage.  But  to  this  we  must  add  the  fact  that  some  of  this 
long-haul  tonnage  reaches  its  remote  destination  over  a  round- 

1  P.  78,  supra.         ^  Senate  (Elkins)  Committee,  1905,  III,  p.  2008. 
VOL.  I — 19 


290  RAILROADS 

about  line,  which  increases  the  already  over-long  carriage  by 
from  twenty-five  to  seventy-five  per  cent.  It  is  apparent  at 
once  that  a  still  greater  dilution  of  the  average  returns  must 
follow  as  a  result.  From  1873  down  to  1900  the  long  and 
almost  uninterrupted  dechne  of  rates  is  an  established  fact. 
Has  the  volume  of  this  economic  waste  increased  or  diminished 
in  proportion  to  the  total  traffic  throughout  this  period?  If  it 
is  relatively  less  today,  at  a  time  when  ton  mile  rates  are 
actually  rising,  it  would  be  of  interest  to  know  how  far  such 
economies  offset  the  real  increases  of  rates  which  have  been 
made.  Rates  might  conceivably  rise  a  little,  or  at  all  events 
remain  constant,  coincidently  with  a  fall  in  ton  mile  revenue 
produced  through  savings  of  this  sort. 

The  third  result  of  undue  disregard  of  distance  is  a  certain 
inelasticity  of  industrial  conditions.  This  may  occur  in  either 
of  two  ways.  The  rise  of  new  industries  may  be  hindered,  or 
a  well-merited  relative  decline  of  old  ones  under  a  process  of 
natural  selection  may  be  postponed  or  averted.  The  first  of 
these  is  well  set  forth  as  follows:  ^ 

"It  is  always  considered  desirable  to  have  a  long  haul,  and  the  rates  on 
a  long  haul  should  be  much  less,  in  proportion  to  distance,  than  on  a 
short  haul.  This  is  a  principle  of  rate-making  which  has  grown  up  as 
one  of  the  factors  in  the  evolution  of  the  railroad  business  in  this  coun- 
try, and  it  has  greatly  stimulated  the  movement  of  freight  for  long  dis- 
tances, has  brought  the  great  manufacturing  centres  in  closer  touch 
with  the  consumer  at  a  distance  and  the  producer  in  closer  touch  with 
centres  of  trade.  It  has  been  of  undoubted  benefit  to  both,  though  it 
may  oftentimes  retard  the  growth  of  new  industries  by  a  system  of 
rates  so  preferential  as  to  enable  the  manufacturer  a  long  distance  from 
the  field  of  production  of  raw  material  to  ship  the  raw  material  to  his 
mills,  manufacture  it  and  return  the  manufactured  goods  cheaper 
than  the  local  manufacturer  could  afford  to  make  it,  and  thus,  while 
building  up  the  centres  of  manufacture,  have  retarded  the  growth  of 
manufacturing  in  the  centres  where  the  raw  material  is  produced." 

The  other  aspect  of  industrial  rigidity  is  manifested  through  the 

perpetuation  of  an  industry  in  a  district,  regardless  of  the 

1  Senate  (Elkins)  Committee,  1905,  IV,  p.  3115. 


PROBLEMS  OF  ROUTING  291 

physical   disabilities   under  which   it   is   conducted.     Another 
quotation  describes  it  well.^ 

Senator  Caraiack.  Is  it  the  policy  of  the  roads,  wherever  they 
find  an  industry  established,  to  keep  it  going  by  advantages  in  the 
way  of  rates  regardless  of  changes  in  economic  conditions? 

Mr.  TuTTLE.  I  tliink  in  so  far  as  it  is  possible  for  them  to  do  so. 
It  has  not  been  possible  in  all  cases.  We  could  not  keep  iron  furnaces 
running  in  New  England;  they  are  all  gone. 

One  cannot  for  a  moment  doubt  the  advantages  of  such  a 
policy  as  a  safeguard  against  violent  dislocating  shocks  to 
industry.  It  may  render  the  transition  to  new  and  better  con- 
ditions more  gradual  and  easier  to  bear.  It  has  been  of  inesti- 
mable value  to  New  England,  as  exposed  to  the  competition  of 
newer  manufactures  in  the  Central  West.  But  on  the  other 
hand,  it  is  equally  true  that  in  the  long  run  the  whole  country 
will  fare  best  when  each  industry  is  prosecuted  in  the  most 
favored  location  —  all  conditions  of  marketing  as  well  as  of 
mere  production  being  considered.  If  Pittsburg  is  the  natural 
centre  for  iron  and  steel  production,  it  may  not  be  an  unmixed 
advantage  to  the  country  at  large,  however  great  its  value  to 
New  England,  to  have  the  carriers  perpetuate  the  barbed  wire 
manufacture  at  Worcester.^  Each  particular  case  would  have 
to  be  decided  on  its  merits.  My  purpose  at  present  is  not  to 
pass  judgment  on  any  of  them  but  merely  to  call  attention 
to  the  effect  of  such  practices  upon  the  process  of  industrial 
selection. 

In  the  fifth  place,  every  waste  in  transportation  service  is  in 
the  long  run  a  tax  upon  the  productivity  of  the  countrj'.  More 
men  may  be  employed,  more  wages  paid,  more  capital  kept  in 
circulation;  but  it  still  remains  true  that  the  coal  consumed, 
the  extra  wages  paid  and  the  rolling  stock  used  up  in  the  carriage 
of  goods,  either  unduly  far  or  by  unreasonably  roundabout 
routes,  constitute  an  economic  loss  to  the  community.    In  many 

1  Idem,  II,  p.  976. 

2  Specifically  described  in  Senate  (Elkins)  Committee,  1905,  II,  p.  923. 


292  RAILROADS 

cases,  of  course,  it  may  be  an  inevitable  offset  for  other  advan- 
tages. In  the  Savannah  Freight  Bureau  case  ^  (map,  p.  648,  infra) 
Valdosta,  Georgia,  was  158  miles  from  Savannah,  while  it  was 
275  and  413  miles  by  the  shortest  and  longest  lines  respec- 
tively from  Charleston.  Valdosta's  main  resource  for  fertilizer 
supplies,  other  things  being  equal,  would  naturally  be  Savannah, 
the  nearer  city.  Yet  in  the  year  in  question  it  appeared  that 
nine-tenths  of  the  supply  was  actually  drawn  from  Charleston; 
and  much  of  it  was  hauled  413  instead  of  a  possible  158  miles. 
No  wonder  the  complainants  alleged  "that  somebody  in  the 
end  must  pay  for  that  species  of  foolishness."  Whenever  the 
Colorado  Fuel  and  Iron  Company  succeeds  in  selling  goods  of 
no  better  grade  or  cheaper  j^rice  in  territory  naturally  tributary 
to  Pittsburg,  a  tax  is  laid  upon  the  public  to  that  degree.^  When 
Chicago  and  New  York  jobbers  each  strive  to  invade  the  other's 
field,  the  extra  revenue  to  the  carriers  may  be  considerable; 
but  it  is  the  people  who  ultimately  pay  the  freight.  The  analogy 
to  the  bargain  counter  is  obvious.  The  public  are  buying  some- 
thing not  necessary  for  less  than  cost;  while  the  carriers  are 
selling  it  for  more  than  it  is  worth.  Economies  would  redound 
to  the  advantage  of  all  parties  concerned. 

What  remedy  is  possible  for  these  economic  wastes?  Both 
the  carriers  and  the  public  have  an  interest  in  their  abatement. 
The  more  efficient  industrial  combinations  have  taken  the 
matter  in  hand,  either  by  strategic  location  of  plants  or,  as  in 
the  case  of  the  United  States  Steel  Corporation,  by  the  utiliza- 
tion of  a  Pittsburg  base  price  scheme,  with  freight  rates  added.* 
But  probably  the  large  proportion  of  tonnage  is  still  shipped  by 
independent  and  competing  producers.     To  this  traffic  the  rail- 

^  7  Int.  Com.  Rop.,  458;  reprinted  in  our  Railway  Problems,  chap.  XII. 

^  "Practically  it  may  be  declared  that  the  public,  considered  as  distinct 
from  railway  owners,  must  pay  for  all  the  transportation  which  it  receives." 
.  .  .  H.  T.  Newcomb  in  Pubs.  Am.  Slat.  Ass.,  N.  S.  Nr.  34,  p.  71. 

'  Agreements  for  a  scale  of  cross  freights  by  wholesalers'  or  jobbers' 
associations  as  in  Ohio  for  groceries  or  hardware  are  equally  effective. 


PROBLEMS  OF  ROUTING  293 

ways  must  apply  their  own  remedies.  Either  one  of  two  plans 
might  be  of  service.  The  right  to  make  valid  agreements  for  a 
division  either  of  traffic  or  territory,  if  conceded  to  the  carriers 
by  law  under  proper  governmental  supervision,  would  be  an 
effective  safeguard.  This  would  mean  the  repeal  of  the  present 
prohibition  of  pooling.  The  amendment  of  the  long  and  short 
haul  clause  in  1910  (p.  601  infra)  seems  likely  to  do  nmch 
toward  accomplishing  the  same  result. 

Agreements  between  carriers  previous  to  1887  were  often 
employed  to  obviate  unnecessary  waste  in  transportation.  The 
division  of  territory  between  the  eastern  and  western  lines  into 
the  southern  states  is  a  case  in  point.  Thirty  years  ago  com- 
petition for  trade  throughout  the  South  was  very  keen  between 
the  great  cities  in  the  East  and  in  the  Middle  West.  Direct 
lines  to  the  northwest  from  Atlanta  and  Nashville  opened  up  a 
new  avenue  of  communication  with  ambitious  cities  like  Chicago, 
St.  Louis  and  Cincimiati.  The  state  of  Georgia  constructed  the 
Western  and  Atlantic  Railroad  in  1851  for  the  express  purpose 
of  developing  this  trade.  As  western  manufactures  developed, 
a  keen  rivalry  between  the  routes  respectively  east  and  west  of 
the  Alleghany  mountains  into  the  South  was  engendered.  A 
profitable  trade  in  food  products  by  a  natural,  direct  route  from 
the  Ohio  gateways  was,  however,  jeopardized  by  ruinous  rates 
made  by  the  warring  trunk  lines  to  the  northern  seaboard. 
Corn,  oats,  wheat  and  pork  came  down  the  coast  and  into  the 
South  through  the  back  door,  so  to  speak,  by  way  of  Savannah 
and  other  seaports.  On  the  other  hand  the  eastern  lines  into 
the  South  were  injuriously  affected  by  the  retaliatory  rates  on 
manufactured  goods  made  by  the  western  lines  for  shipments 
from  New  York  and  New  England.  Freight  from  each  direc- 
tion was  being  hauled  round  three  sides  of  a  rectangle.  Finally 
in  1878  a  reasonable  remedy  was  found  in  a  division  of  the  field 
and  an  agreement  to  stop  all  absurdly  circuitous  long  hauls  into 
one  another's  natural  territory.  A  line  was  drawn  through 
the  northern  states  from  Buffalo  to  Pittsburg  and  Wheeling; 


294  RAILROADS 

through  the  South  from  Chattanooga  by  Montgomery,  Ala., 
to  Pensacola.  Eastern  Hnes  were  to  accept  goods  for  shipment 
only  from  their  side  of  this  line  to  points  of  destination  in  the 
South  also  on  the  eastern  side  of  the  boundary.  Western 
competitors  were  to  do  the  same.  The  result  was  the  recogni- 
tion of  natural  rights  of  each  to  its  territory.  This  agreement 
has  now  formed  the  basis  of  railway  tariffs  into  the  southern 
states  for  almost  a  generation.  Similar  agreements,  on  a  less 
extensive  scale,  are  commonly  used  to  great  advantage.  Thus 
in  the  "common  point"  territory  formerly  tributary  to  Wil- 
mington, Savannah  and  Charleston,  the  first  named  city  in- 
sisted upon  its  right  to  an  equal  rate  with  the  other  two,  no 
matter  how  great  the  disparity  of  distance.  The  Southern 
Railway  and  Steamship  Association  arbitrated  the  matter, 
fixing  a  line  beyond  which  Wilmington  was  to  be  excluded.^ 
Obviously  such  agreements  have  no  force  in  law  at  the  present 
time.  The  only  way  to  give  effect  to  them  is  for  connecting 
carriers  to  refuse  to  make  a  joint  through  rate.  This  effectually 
bars  the  traffic.  Moreover  entire  unanimity  of  action  is  essen- 
tial. Every  road  must  be  a  party  to  the  compact.  Otherwise 
the  traffic  will  reach  its  destination  by  shrunken  rates  and  a 
more  circuitous  carriage  even  than  before. 

One  cannot  fail  to  be  impressed  in  Austria  and  Germany 
with  the  economic  advantages  of  an  entirely  unified  system  of 
operation.  No  devious  routing  is  permitted.  Certain  lines  are 
designated  for  the  heavy  through  traffic,  and  concentration  on 
them  is  effected  to  the  exclusion  of  all  others.  Between  Berlin 
and  Bremen,  for  example,  practically  all  through  traffic  is  routed 
by  three  direct  lines.  No  roundabout  circuits  occur  because  of 
the  complete  absence  of  railway  competition.  No  independent 
lines  have  to  be  placated.  The  sole  problem  is  to  cause  the 
tonnage  to  be  most  directly  and  economically  transported.  And 
this  end  is  constantly  considered  in  all  pooling  or  through-traffic 
arrangements  with  the  railway  systems  independently  operated. 
1  7  Int.  Com.  Rep.,  458;  in  our  Railway  Problems,  chap.  XII. 


PROBLEMS  OF  ROUTING  295 

The  Prussian  pooling  agreements  with  the  Bavarian  railways 
are  tj^pical.  Each  party  to  the  contract  originally  bound 
itself  not  to  route  freight  over  any  line  exceeding  the  shortest 
direct  one  in  distance  by  more  than  twenty  per  cent.  Compare 
this  with  some  of  our  American  examples  of  surplus  haulage  of 
fifty  or  sixty  per  cent!  And  within  the  last  year,  the  renewal 
of  these  interstate  governmental  railwaj^  pools  in  Germany  has 
provided  for  a  reduction  of  excessive  haulage  to  ten  per  cent. 
The  problem  of  economical  operation  in  Austria-Hungary  with 
its  mixed  governmental  and  private  railways  is  more  difficult. 
But  no  arrangements  are  permitted  which  result  in  such  wastes 
as  we  have  instanced  under  circumstances  of  unlimited  compe- 
tition in  the  United  States. 

A  more  consistent  enforcement  of  the  long  and  short  haul 
principle  might  provide  a  remedy  almost  as  effective  as  pool- 
ing. The  Alabama  Midland  decision  nullified  a  salutary  provi- 
sion of  the  law  of  1887  by  holding  that  railway  competition  at 
the  more  distant  point  might  create  such  dissimilarity  of  cir- 
cumstances as  to  justify  a  higher  rate  to  intermediate  sta- 
tions. Turn  to  our  diagram  on  page  282  and  observe  the  effect. 
Traffic  around  two  sides  of  a  triangle  from  A  to  C  by  way  of 
B  is  carried  at  a  rate  equal  to  the  charge  for  the  direct  haul 
from  A  to  C;  or  it  may  be  even  at  a  lower  differential  rate. 
Complaint  arises  from  the  intermediate  points  y  and  x  of  rela- 
tively unreasonable  charges.  The  roundabout  route  replies 
with  the  usual  argument  about  a  small  contribution  toward 
fixed  charges  from  the  long  haul  tonnage,  which  lessens  the 
burden  upon  the  intermediate  rate.  This  is  cogent  enough  up 
to  a  certain  point.  It  might  justify  a  lower  rate  to  D,  on  the 
natural  division  of  line  territory.  It  might  be  defensible  on 
principle  to  accord  D  a  lower  rate  than  x  or  possibly  even  than 
y.  To  deny  the  validity  of  lower  rates  to  z  or  C  would  however 
at  once  follow  from  the  same  premises. 

Under  the  new  long  and  short  haul  clause,  what  may  be  done 
by  the  Interstate  Commerce  Commission?    This  body  roughly 


296  RAILROADS 

determining  the  location  of  D,  a  natural  division  point,  would 
then  refuse  to  permit  A  B,  B  C  to  charge  less  to  either  z  or  C 
than  to  any  intermediate  point,  x,  B  or  y.  Coincidently  it 
would  bar  the  other  road  A  C,  C  B  from  any  lower  through 
rate  to  points  beyond  D,  such  as  x,  B  or  y  than  to  any  inter- 
mediate station.  Two  courses  would  be  open  to  the  roads. 
They  must  either  mutually  withdraw  from  all  business  beyond 
D  or  reduce  their  rates  to  all  intermediate  points  correspond- 
ingly. In  a  sparsely  settled  region  with  little  local  business, 
they  might  conceivably  choose  the  latter  expedient.  But  in 
the  vast  majority  of  cases  the  roads  would  prefer  to  withdraw 
from  the  unreasonably  distant  fields.^  Simultaneously  taken 
by  each  line,  such  action  would  put  an  end  to  the  economic 
waste.  At  the  same  time  it  would  terminate  one  of  the  most 
persistent  causes  of  rebates  and  personal  favoritism.  To  be 
sure  it  would  generally  operate  in  favor  of  the  strong,  direct 
lines  as  against  the  weak  and  roundabout  ones.  Great  benefit 
would  accrue  to  the  Pennsylvania,  the  Illinois  Central  or  the 
Union  Pacific  railroads.  The  activities  of  the  parasitic  roads 
and  the  scope  of  parasitic  operations  by  the  substantial  roads 
would  inevitably  be  curtailed.  Much  justice  would  be  done  and 
much  local  irritation  and  popular  discontent  would  be  allayed. 

^  This  problem  is  involved  in  the  Youngstown-Pittsburg  case  already 
mentioned.  In  the  original  Louisville  and  Nashville  decision  the  Commis- 
sion apparently  preferred  to  encourage  competition  even  at  the  risk  of  its 
being  roundabout  and  "illegitimate."  But  after  the  railway  attorneys 
expanded  the  "rare  and  peculiar"  cases  to  cover  all  kinds  of  competition, 
the  Commission  apparently  regretted  its  earher  position.  Cf.  1  I.C.C. 
Rep.,  82;  5  Idem,  389;  and  especially  the  brief  of  Ed.  Baxter,  Esq.,  in  the 
Alabama  Midland  case,  U.  S.  Supreme  Court,  Oct.  term,  1896,  No.  563, 
p.  118. 


CHAPTER  IX 
FREIGHT   CLASSIFICATION! 

Importance  and  nature  of  classification  described,  300.  —  Classifications 
and  tariffs  distinguished,  as  a  means  of  changing  rates,  301.  —  The 
three  classification  committees,  304.  —  Wide  differences  between  them 
illustrated,  305.  —  Historical  development,  30G.  —  Increase  in  items 
enumerated,  309.  —  Growing  distinction  between  carload  and  less- 
than-carload  rates,  310.  —  Great  volume  of  elaborate  rules  and  de- 
scriptions, 312.  —  Theoretical  basis  of  classification,  314.  — •  Cost  of 
service  v.  value  of  service,  315.  —  Practically,  classification  based  upon 
rule  of  thumb,  319.  —  The  "spread"  in  classification  between  com- 
modities, 319.  —  Similarly  as  between  places,  320.  —  Commodity  rates 
described,  322.  —  Natural  in  undeveloped  conditions,  323.  —  Various 
sorts  of  commodity  rates,  324.  —  The  problem  of  carload  ratings,  325. 
—  Carloads  theoretically  considered,  326.  —  Effect  upon  commercial 
competition,  327.  —  New  England  milk  rates,  329.  —  Mixed  carloads, 
331.  —  Minimum  carload  rates,  322.  —  Importance  of  car  capacity, 
334.  —  Market  capacity  and  minimum  carloads,  336. 

Uniform  classification  for  the  United  States,  337.  —  Revival  of  interest 
since  1906,  339.  —  Overlapping  and  confficting  jurisdictions,  340.  — 
Confusion  and  discrimination,  341.  —  Anomalies  and  conflicts  illus- 
trated, 342.  —  Two  main  obstacles  to  uniform  classification,  345.  — 
Reflection  of  local  trade  conditions,  345.  —  Compromise  not  satisfac- 
tory, 346.  — •  Classifications  and  distance  tariffs  interlock,  347.  — 
General  conclusions,  351. 

Imagine  the  Encyclopaedia  Britannica,  a  Chicago  mail-order 
catalogue  and  a  United  States  protective  tariff  law  blended  in  a 
single  volume,  and  you  have  a  freight  classification  as  it  exists 

1  1901.  Ripley,  W.  Z.;  Report  U.S.  Industrial  Commission,  XIX,  pp. 
383-397. 

1902.  Interstate  Commerce  Commission,  Railways  in  the  U.  S.  in 
1902.     Part  II.  [Fine  data.] 

1905.    Acworth,  W.  M.;   Elements  of  Railway  Economics,  pp.  99-118. 

1909.  Dunn,  S.  O.;  Uniform  Classification,  Railway  Age  Gazette, 
XLVII,  pp.  413,  462,  497,  552. 

1911.  Hammond,  M.  B.;  Railway  Rate  Theories  of  the  Interstate 
Commerce  Commission. 

1912.  Strombeck,  J.  F.;  Freight  Classification.  (Limited  to  classified 
schedules.) 


298 


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300  RAILROADS 

in  the  United  States  at  the  present  time!  A  few  selections 
from  the  first  and  last  items  of  such  a  document  are  reproduced 
on  the  preceding  pages.  They  give  some  idea  of  the  amazing 
scope  of  trade.  Such  a  classification  is,  first  of  all,  a  list  of 
every  possible  commodity  which  may  move  by  rail,  from 
Academy  or  Artist's  Board  and  Accoutrements  to  Xylophones 
and  Zylonite,  In  this  list  one  finds  Algarovilla,  Bagasse, 
"Pie  Crust,  Prepared";  Artificial  Hams,  Cattle  Tails  and 
Wombat  Skins;  Wings,  Crutches,  Cradles,  Baby  Jumpers  and 
all;  together  with  Shoo  Flies  and  Grave  Vaults.  Every  thing 
above,  on,  or  under  the  earth  will  be  found  listed  in  such  a 
volume.  To  grade  justly  all  these  commodities  is  obviously 
a  task  of  the  utmost  nicety.  A  few  of  the  dehcate  questions 
which  have  puzzled  the  Interstate  Commerce  Commission  may 
give  some  idea  of  the  complexity  of  the  problem. ^  Shall  cow 
peas  pay  freight  as  "vegetables,  N.  O  .  S.,  dried  or  evaporated," 
or  as  "fertilizer"  —  being  an  active  agent  in  soil  regeneration? 
Are  "iron-handled  bristle  shoe-blacking  daubers"  machinery 
or  toilet  appliances?  Are  patent  medicines  distinguishable,  for 
purposes  of  transportation,  from  other  alcoholic  beverages  used 
as  tonics?  What  is  the  difference,  as  regards  rail  carriage, 
between  a  percolater  and  an  every-day  coffee  pot?  Are  Grand- 
pa's Wonder  Soap  and  Pearline  —  in  the  light  of  the  claims 
put  forth  by  manufacturers,  suitable  either  for  laundry  or 
toilet  purposes  —  to  be  put  in  different  classes  according  to 
their  uses  or  their  market  price?  When  is  a  boiler  not  a  boiler? 
If  it  be  used  for  heating  purposes  rather  than  steam  generation, 
why  is  it  not  a  stove?  What  is  the  difference  between  raisins 
and  other  dried  fruits,  unless  perchance  the  carrier  has  not 
yet  established  one  industry  while  another  is  already  firmly 
rooted  and  safe  against  competition? 

The  classification  of  all  these  articles  is  a  factor  of  primary 
importance  in  the  making  of  freight  rates  both  from  a  public  and 

1  10  I.C.C.  Rep.,  281;    13  Idem,   111;   4  Ideyn,  32;    9  Idem,  264;  17 
Idem,  511;   23  Idem,  242;   2  Idem,  1. 


CLASSIFICATION  301 

private  point  of  view.  Attention  has  been  directed  of  late  to 
its  significance  and  importance  to  the  private  shipper,  by  reason 
of  the  use  made  of  it  in  the  advances  of  freight  rates  which  have 
taken  place  throughout  the  comitry  withui  the  past  decade. 
Its  public  importance  has  not  been  fully  appreciated  until 
recently  as  affecting  the  general  level  of  railway  charges.  So 
little  was  its  significance  understood,  that  supervision  and 
control  of  classification  were  not  apparently  contemplated  by 
the  original  Act  to  Regulate  Conmaerce  of  1887.  The  anomaly 
existed  for  many  years,  therefore,  of  a  grant  of  power  intended 
to  regulate  freight  rates,  which,  at  the  same  time,  omitted 
provision  for  control  over  a  fundamentally  important  element 
in  their  make-up.  The  Interstate  Commerce  Commission,  how- 
ever, assumed  jurisdiction  over  the  matter:  and  for  more  than 
twenty  years,  despite  doubts  expressed  by  the  Department 
of  Justice  as  to  its  legality,  passed  upon  complaints  as  to 
unreasonable  classification  without  protest  even  from  the 
carriers  themselves.  Control  over  it  has  now  been  assured 
beyond  possibility  of  dispute  by  the  specific  provisions  of  the 
Hepburn  Act  of  1910. 

The  freight  rate  upon  a  particular  commodity  between  any 
given  points  is  compounded  of  two  separate  and  distinct 
factors:  one  having  to  do  with  the  nature  of  the  haul,  the  other 
with  the  nature  of  the  goods  themselves.  Two  distinct  publi- 
cations must  be  consulted  in  order  to  determine  the  actual 
charge.  Although  both  of  them  usually  bear  the  name  of  a 
railway  and  are  issued  over  its  signature,  they  emanate,  never- 
theless, from  entirely  different  sources.  -The  first  of  these  is 
known  as  the  Freight  Tariff.  It  specifies  rates  in  cents  per 
hundred  pounds  for  a  number  of  different  classes  of  freight, 
numerically  designated,  between  all  the  places  upon  each  line 
or  its  connections.  Thus  the  tariff  of  the  New  York  Central 
&  Hudson  River  Railroad  gives  rates  per  hundred  pounds 
from  New  York  to  several  hundred  stations,  for  first,  second, 
third,  etc.,  classes.     This  freight  tariff,  however,  contains  no 


302  RAILROADS 

mention  whatever  of  commodities  by  name.  The  second 
pubUcation  which  must  be  consulted  supphes  this  defect.  This 
is  known  as  the  Classification.  Its  function  is  to  group  all 
articles  more  or  less  alike  in  character,  so  far  as  they  affect 
transportation  cost,  or  are  affected  in  value  by  carriage  from 
place  to  place.  These  groups  correspond  to  the  several  numeri- 
cal classes  already  named  in  the  freight  tariff.  Thus  dry  goods 
or  boots  and  shoes  are  designated  as  first  class.  Turning  back 
to  the  freight  tariff,  the  rate  from  New  York,  for  example,  to 
any  particular  place  desired,  for  such  first-class  freight,  is  then 
found  in  cents  per  hundred  pounds.  It  thus  appears,  as  has 
been  said,  that  a  freight  rate  is  made  up  of  two  distinct  elements 
equal  in  importance.  The  first  is  the  charge  corresponding 
to  the  distance;  the  other  is  the  charge  as  determined  by  the 
character  of  the  goods.  Consequently,  a  variation  in  either 
one  of  the  two  would  result  in  changing  the  final  rate  as 
compounded.^ 

A  concrete  illustration  or  two  may  emphasize  the  commer- 
cial importance  of  classification.  So  far  as  it  may  be  used  to 
effect  an  increase  of  rates,  the  following  case  is  typical,  as 
given  by  a  Boston  manufacturer,  in  evidence  before  the  Senate 
Committee  on  Interstate  Commerce  in  1905: 

"From  July  15,  1889,  to  January  1,  of  this  year,  the  classi- 
fication (of  carbon  black,  basis  of  printers'  ink)  continued  to 
be  once  and  a  half  first  class  in  less-than-carload  lots,  third  class 
in  carload  lots,  approximately  twice  the  freight  required  between 
1887  and  1889.  Meanwhile,  the  price  had  declined.  .  .  .  On 
January  1  the  classification  was  again  raised,  to  class  2,  rule  25, 
an  increase  of  about  ten  per  cent,  in  carload  lots.  Numerous 
efforts  have  been  made  by  myself  and  others  to  have  this  com- 
modity classified  where  it  belongs,  as  dry  color,  but  the  only 
result  has  been  the  reverse  of  what  we  desired;  and  the  industry 

1  Railways  in  the  United  States  in  1902,  by  the  Interstate  Commerce 
Commission,  1903.  Part  II,  p.  24,  gives  much  data  on  changes  of  classi- 
fication of  specific  articles  since  1886. 


CLASSIFICATION  303 

has  been  and  is  in  a  somewhat  precarious  condition,  as  we  have 
contracted  for  millions  of  pounds  of  black  at  prices  fixed  at  the 
point  of  delivery,  and  had  no  notice  of  the  raise  in  freight  rate 
until  subsequent  to  its  going  into  operation."  ^ 

The  Spokane  Chamber  of  Commerce,  in  these  same  Senate 
Committee  hearings,  gave  an  illustration  of  the  use  of  classi- 
fication to  bring  about  a  change  of  rates  without  modifying 
the  individual  railway  tariff.  "The  Pacific  Coast  Pipe  Com- 
pany started  to  make  wired  wooden  pipe  in  the  spring  of  1900. 
.  .  .  There  was  at  that  time  but  one  factory  of  the  kind  on 
the  North  Pacific  coast,  located  at  Seattle.  .  .  .  The  Seattle 
factory,  backed  by  the  big  lumber  firms  on  the  coast,  finding 
a  serious  competitor  in  the  Spokane  field,  got  the  railways  to 
put  manufactured  pipe  under  the  lumber  classification,  thus 
reducing  the  rate  from  Seattle  to  Spokane  from  forty-six  to 
tw^enty  cents  per  100  pounds.  .  .  .  The  Spokane  factory  at 
once  filed  a  vigorous  protest,  wdth  the  result  that  the  rail- 
ways put  back  the  rate  from  Seattle  to  Spokane  to  forty-six 
cents,  but  established  a  maximum  rate  of  fifty  cents  for  Seattle 
pipe,  which,  of  course,  shut  off  all  territory  east  of  Spokane 
from  the  Spokane  factory.  .  .  .  The  remnant  of  the  Spokane 
factory  .  .  .  has  been  compelled  to  shut  down,  and  the  entire 
plant  is  being  removed  to  Ballard."  Whether  these  facts  are 
exactly  as  thus  informally  stated  or  not,  is  by  the  way.  If  not 
done  at  this  time,  it  is  certain  that  similar  manipulation  of 
classification  rules  often  enters  into  commercial  competition.^ 

Freight  tariffs  and  classifications  are  as  distinct  and  inde- 
pendent in  source  as  they  are  in  nature.  Tariffs  are  issued  by 
each  railway,  by  and  for  itself  alone  and  upon  its  sole  authority. 
Classifications,  on  the  other  hand,  do  not  originate  ^^dth  par- 
ticular railways  at  all;  but  are  issued  for  them  by  cooperative 
bodies,  known  as  classification  committees.     These  committees 

*  For  the  rate  advances  of  1900,  mainly  effected  by  this  means;  U.  S. 
Industrial  Commission,  IX,  p.  859,  and  XIX,  p.  282. 

*  C/.  underclassification  as  a  means  of  rebating;  p.  190,  supra. 


304  RAILROADS 

are  composed  of  representatives  from  all  the  carriers  operating 
within  certain  designated  territories.  In  other  words,  the 
United  States  is  apportioned  among  a  number  of  committees, 
to  each  of  which  is  delegated  by  the  carriers  concerned,  the 
power  over  classification;  that  is  to  say,  the  right  to  assign 
every  commodity  which  may  be  shipped  or  received  to  any 
particular  group  of  freight  ratings.  This  delegation  of  authority 
is  always  subject,  however,  to  the  right  of  filing  whatever 
exceptions  to  the  classification  any  railway  may  choose  inde- 
pendently to  put  in  force.  These  exception  sheets  contain  the 
so-called  commodity  tariffs,  to  be  subsequently  described, 
which  stand  out  in  sharp  relief  against  the  so-called  class  rates. 
Such  exceptions  are  independently  filed  by  each  railway  at 
Washington  and  do  not  generally  form  integral  parts  of  the 
volume  issued  by  the  classification  committee,  except  in  the 
southern  states.  New  editions  of  these  classifications  are 
published  from  time  to  time  as  called  for  by  additions  or  amend- 
ments, the  latest,  of  course,  superseding  all  earher  ones.  Thirty- 
seven  such  issues  have  already  appeared  in  series  in  trunk  line 
and  southern  territory,  while  fifty  have  been  put  forth  in 
western  territory,  since  the  practice  was  standardized  in  1888. 
At  the  present  time  freight  classification  for  all  the  railways 
of  the  United  States  is  performed  mainly  by  three  committees, 
known  as  the  Official,  the  Southern  and  the  Western,  wdth 
headquarters,  respectively,  in  New  York,  Atlanta  and  Chicago. 
Each  of  these  three  committees  has  jurisdiction  over  a  particular 
territory.  Thus  the  Official  Classification  prevails  east  of 
Chicago  and  north  of  the  Ohio  and  the  Potomac;  the  Southern, 
over  the  remaining  part  of  the  country  east  of  the  Mississippi; 
and  the  Western,  throughout  the  rest  of  the  United  States. 
In  addition  to  these  three  primary  classifications  there  is  also 
another,  issued  by  the  Transcontinental  Freight  Bureau,  with 
headquarters  at  Chicago.  This  committee  has  supervision 
over  classification  upon  the  Pacific  coast  business.  A  number 
of  the  states  also,  notably  Illinois,  Iowa  and  most  of  the  south- 


CLASSIFICATION  305 

western  commonwealths,  promulgate  state  classifications  having 
relation,  however,  only  to  local  business  within  their  several 
jurisdictions.  These  are  prescribed  by  law  and  represent  modi- 
fications to  suit  peculiar  exigencies  or  to  foster  local  trade 
ambitions.  There  are  also  a  number  of  other  cooperative  local 
railway  committees,  each  dealing  wuth  the  special  concerns  of 
its  o^m  territory,  and  representing  the  joint  interests  of  the 
railways  therein  included  to  all  the  world  outside.  Thus,  for 
instance.  Southern  Classification  territory  is  subdivided  into 
local  units,  known,  respectively,  as  the  Southeastern  Mississippi 
Valley  Association,  the  Southeastern  Freight  Association,  and 
the  Associated  Railways  of  Virginia  and  the  Carolinas.^  But 
for  all  practical  purposes,  so  far  as  the  larger  problems  of  classi- 
fication are  concerned,  our  attention  may  be  concentrated  upon 
the  three  prmcipal  committees  above  mentioned. 

Some  impression  of  the  wide  differences  between  these  three 
main  classifications  in  different  parts  of  the  country  may  be 
derived  from  the  set  of  excerpts  at  the  head  of  this  chapter. 
In  three  parallel  columns  the  alpha  and  omega  of  each  are 
reproduced,  together  with  bits  of  one  of  the  most  complicated 
schedules,  viz.,  that  dealing  with  agricultural  implements. 
Even  where  the  same  commodities  occur  in  each  classification, 
the  diversity  in  description,  mode  of  packing,  carload  and  other 
requirements,  renders  any  direct  comparison  almost  impossible. 
The  mere  fact  that  the  class  assignment,  as  shown  at  the  right 
in  each  column,  happens  to  be  the  same,  as  in  the  case  of  acetic 
acid  in  barrels  or  drums  which  moves  both  in  Official  and 
Southern  Classification  territory,  third  class  in  less-than-carload 
lots  (L.  C.  L.)  and  fifth  class  in  carloads  (C.  L.),  shows  noth- 
ing at  all  as  far  as  equality  of  charges  is  concerned.  For,  as 
has  been  said,  this  is  only  half  the  statement  of  the  rate.  The 
spread  between  charges  for  different  classes  yet  remains  to  be 

1  The  Official  Railway  Guide  of  the  United  States  gives  the  personnel 
of  scores  of  these  associations  annually,  with  a  definition  of  the  territory 
of  each. 

VOL.  1—20 


I. 

IV. 

L.C.L.  C.L. 

75 

35 

65   30 

75 

30 

28.5  25 

98 

63 

63   52 

306  RAILROADS 

determined.  The  actual  relativity  between  third-class  and 
fifth-class  rates,  moreover,  may  be  very  different  in  the  two 
places.  In  the  New  York  Board  of  Trade  case^  this  point  was 
well  exemplified.  Comparative  conditions  as  to  rates  in  the 
three  main  sections  of  the  country,  as  they  then  existed,  were 
as  follows: 

Rates  in  Cents  per  Hundredweight 

Canned 
Class  goods 

Miles 

New  York  to  Chicago  (Official  class'n)  .  912 
Chicago  to  Omaha  (West'n  class'n)  .  .  .  490 
Louisville  to  Selma  (South'n  class'n)    .  .   490 

On  the  trunk  lines  fourth-class  rates  were  thus  less  than 
half  those  charged  for  the  first  class;  in  the  West  they  were 
even  lower,  relatively;  while  in  the  South  fourth-class  rates 
were  about  two-thirds  as  high  as  the  first-class  rates.  These 
differences  in  the  spread  between  classes,  as  will  be  seen,  inter- 
locking as  they  do  with  a  multitude  of  other  considerations, 
are  a  serious  bar  to  any  partial  modification  in  the  direction 
of  uniformity  for  the  United  States  as  a  whole.  Only  by  con- 
sideration of  every  factor  entering  into  any  given  rate  may 
comparisons  safely  be  entertained. 

Historically  considered,  the  development  of  freight  classi- 
fication has  been  much  the  same  in  England  and  the  United 
States.  Early  railway  practice  was  an  outgrowth  of  the  tariffs 
in  force  upon  canals  and  toll  roads.-  In  America,  freight 
charges  were  at  the  outset  often  arbitrarily  fixed  by  the  state 
legislatures,  as  conditions  precedent  to  the  grant  of  charter. 
In  many  instances  they  were  based  upon  the  customary  per- 
formance by  wagon,  distinguishing  between  light-weight 
articles  paying  by  the  cubic  foot,  and  heavy  ones  for  which 

1  3  I.C.C.  Rep.,  473. 

2  Acworth's  Elements  of  Railroad  Economics,  p.  104,  is  best  on  Eng- 
land.    CJ.  McPherson's  Raihoad  Freight  Rates,  p.  148. 


CLASSIFICATION  307 

the  tariff  was  based  upon  weight.  Thus  in  1827  the  charter 
of  the  South  Carohna  Railroad  established  its  tolls  at  one 
half  the  usual  wagon  charge.  The  Southern  Pacific  in  local 
rates  on  ore  into  San  Francisco  followed  along  just  below  the 
charges  by  ox  cart.  The  freight  was  proportioned  also  accord- 
ing to  the  length  of  haul  by  an  arbitrary  mileage  rate.  It 
soon  developed,  however,  that  railway  rates  were  unique  in 
the  fact  that  not  only  was  there  a  great  increase  in  the  volume 
of  trade,  but  also  in  the  diversity  of  articles  offered  for  trans- 
portations as  well.  Far  more  elaborate  classifications  were 
soon  seen  to  be  necessary. 

The  South  Carolina  Railroad  tariff  of  1855,  described  by 
McPherson,^  exemplified  the  primitive  traffic  conditions  then 
prevalent.  Goods  were  divided  into  four  classes.  The  first 
consisted  of  articles  of  light  weight  or  high  value,  including, 
for  example,  such  incongruities  as  bomiets,  tea,  and  pianos. 
The  remaining  three  classes  paid  by  weight  with  a  descending 
scale  of  charges.  It  is  difficult  to  explain  why  coffee  and  sugar 
should  be  rated  lower  than  stoves  and  feathers;  or  why  dry 
hides  and  rice  should  be  charged  a  higher  rate  than  cotton 
yarn  and  bacon;  but  it  is  evident  that  a  rough  classification 
according  to  weight,  value,  use  and  cost  of  service  was  being 
attempted.  There  was  in  addition  a  considerable  collection 
of  special  rates  on  chosen  conunodities  according  to  the  method 
of  packing  them,  whether  by  barrel,  bale  or  case.  And  there 
were  also  what  corresponded  to  modern  commodity  rates  upon 
cordwood,  lumber,  bricks,  and  similar  goods.  This  tariff, 
though  primitive,  including  no  less  than  three  hundred  items, 
was  far  more  elaborate  than  those  commonly  used  at  the  time. 
The  Louisville  &  Nashville  originally  distinguished  but  three 
classes:  one  by  bulk,  another  by  weight  and  a  third  appli- 
cable to  live  stock.  Poultry  was  rated  by  the  dozen  long  after 
the  Civil  War,  with  a  higher  charge  for  Muscovy  than  for 
ordinary  ducks.  The  traffic  manager  of  the  Chicago,  Mil- 
1  Op.  cit.,  p.  149. 


308  RAILROADS 

waukee  &  St.  Paul  testified  before  the  Elkins  committee  in 
1905,  that  the  classification  in  Illinois  in  his  youth  was  printed 
on  the  back  of  a  bill  of  lading  no  greater  than  the  size  of  an 
ordinary  sheet  of  letter  paper,  and  the  page  was  not  full. 

From  these  modest  beginnings  the  development  of  classi- 
fication in  the  United  States  was  rapid,  responding  to  the 
ever-increasing  intensity  of  competition  and  the  spread  of 
markets,  particularly  after  1875.  By  the  middle  of  the  eighties 
most  of  the  large  railways  were  working  under  six  or  eight 
different  classifications.  It  began  to  be  apparent  that  some 
check  must  be  placed  upon  such  increasing  complexity.  For 
conditions  were  well-nigh  intolerable,  with  one  set  of  rules 
for  Illinois,  and  yet  another  west  of  Buffalo,  divided  into 
eastbound  and  westbound  sections,  with  still  a  third  on  west- 
ward shipments  local  to  territory  between  Chicago  and  the 
Missouri  river.  The  first  attempt  at  a  systematic  scheme  was 
made  in  1882,  but  the  agreements  then  made  proved  unstable. 
By  1887  conditions  had  become  insupportable,  so  great  was  the 
number  and  the  diversity  of  the  classifications  throughout  the 
country.!  Some  applied  to  local  business  only,  and  were  pe- 
culiar to  each  road.  Some  applied  only  to  westbound  business, 
others  to  eastbound  traffic.  The  traffic  manager  of  the  New 
York  Central  &  Hudson  River  testified  before  the  Interstate 
Commerce  Commission  that  there  were  at  one  time  138  distinct 
classifications  in  trunk  line  territory  alone.  The  case  of  the 
Wabash  in  1883  was  typical.  A  shipper  desiring  to  determine 
freight  rates  over  that  road  might  be  compelled  to  consult  a 
classification  for  the  middle  and  western  states  in  six  classes; 
one  for  the  Southern  Railway  &  Steamship  Association 
territory  in  eighteen  classes;  one  for  Mississippi  valley  busi- 
ness in  five  classes;  one  known  as  the  Revised  Western  in  nine 
classes;  the  Trunk  Line  East  in  thirteen  classes;  the  Trunk 
Line  West  in  five  classes;  a  classification  for  Texas  points  in 
eight  classes;  and  two  for  the  Pacific  coast,  according  to  di- 
^  CuUom  Committee,  Testimony,  p.  759. 


CLASSIFICATION  309 

rection,  in  eight  and  nine  classes,  respectively.  This  situation, 
rendering  it  almost  impossible  for  any  shipper  to  determine 
in  advance  what  his  freight  rates  were  going  to  be,  as  well  as 
what  his  competitor  was  paying,  early  impressed  itself  upon 
the  Interstate  Commerce  Commission.  And  it  was  doubtless 
due  in  part  to  its  initiative  that  classifications  were  shaken 
down  into  substantially  their  present  general  form  in  1888. 

The  natural  growth  of  classification  in  a  rapidly  develop- 
ing country  like  the  United  States,  has  manifested  itself  in 
three  distinct  ways:  there  has  been  a  steady  increase  in  the 
number  of  items  of  freight  separately  enumerated;  a  growing 
distinction  in  rates  between  carload  and  less-than-carload 
shipments;  and  a  steadily  enlarging  volume  of  the  most  elab- 
orate special  rules  and  descriptions.  As  for  the  mere  increase" 
in  distinct  commodities  enumerated,  in  the  East  in  1886  there 
had  come  to  be  about  1,000.  The  first  Oflficial  Classification 
in  the  following  year  increased  to  2,800  items;  and  by  1893, 
in  the  eleventh  issue,  there  were  twice  that  number.  The 
latest  Official  Classification,  No.  34  in  1909,  contained  approx- 
imately 6,000  separate  enumerations  —  not  many  more,  in 
fact,  than  fifteen  years  earlier.  The  point  of  saturation,  or 
else  the  limit  of  human  ingenuity,  seems  to  have  been  about 
reached  some  years  ago.  The  same  thing  was  true  of  the 
Western  Classification.  In  1893  this  contained  3,658  items, 
representing  an  increase  of  about  2,000  over  the  number  of 
commodities  classified  by  name  in   1886.     By   1909,   as  the 

Number  of  Ratings  in  1909  ^ 

Less  than  Carload  Carload 

Southern  Classification 3,503  703 

Western  Classification 5,729  1,690 

Official  Classification    5,852  4,235 

above  figures  show,  it  comprehended  5,729,  almost  as  many 

separate  items,  in  fact,  for  less-than-carload  lots  as  were  recog- 

^  Railway  Age  Gazette,  September  8,  1911,  p.  458. 


310  RAILROADS 

nized  in  trunk  line  territory.  Only  in  carload  ratings  is  the 
Western  Classification  less  extensive.  The  Southern  Classi- 
fication reflected  somewhat  simpler  trade  conditions  pre- 
valent south  of  the  Ohio  river,  by  the  relatively  smaller 
number  of  articles  enumerated;  but  it  should  be  added 
that  the  number  of  exceptions  —  filling  no  less  than  160 
pages  in  the  latest  issue  —  is  indicative  throughout  of  a  lesser 
degree  of  standardization  than  is  found  elsewhere.  Perhaps 
the  most  striking  feature  of  the  southern  system  is  the  very 
small  proportion  of  carload  rates.  But  it  should  be  noted 
in  this  connection  that  the  basing  point  system  afforded  prefer- 
ence to  market  towns  in  any  event;  so  that  jobbers  in  such 
places  did  not  need  wholesale  rates  to  the  same  degree.  This 
phase  of  the  matter  will  be  elsewhere  discussed.^ 

The  second  natural  tendency  in  the  development  of  classi- 
fication above  mentioned,  is  an  increase  in  the  number  of 
separate  ratings  for  large  and  small  shipments.  The  normal 
growth  of  trade  ought  to  make  possible  a  steady  increase 
in  shipments  by  the  carload,  rather  than  by  the  box,  barrel, 
or  case;  and  the  increase  in  the  number  of  separate  carload 
ratings  —  always,  of  course,  at  a  reduced  rate  by  comparison 
with  less-than-carload  lots  —  conforms  territorially  to  the 
growth  in  the  volume  of  trade.  In  1877,  even  in  trunk  line 
territory,  only  twenty-four  commodities  were  accorded  a  special 
carload  rate.^  By  1880  the  number  had  increased  to  50,  and 
seven  years  later  to  160.  Just  before  the  passage  of  the  Act 
to  Regulate  Commerce  there  was  no  distinction  between  car- 
load and  small  lots  in  eighty-five  per  cent,  of  the  articles  enum- 
erated. A  sudden  change  supervened  in  the  first  Official 
Classification  issued  after  the  Federal  Act.  The  number  of 
carload  ratings  was  suddenly  raised  to  900,  provoking  a  storm 
of  protest  from  eastern  shippers  who  resented  this  advantage 
accorded  to  jobbers  in  the  West  and  South,  because  it  en- 
abled the  latter  to  buy  their  supplies  directly  at  wholesale. 
1  P.  385,  infra.  '  3  I.C.C.  Rep.,  473. 


CLASSIFICATION  311 

The  dispute  between  dealers  in  the  older  and  newer  commer- 
cial centres  came  to  a  head  in  the  so-called  New  York  Board 
of  Trade  and  Transportation  case  of  1888,  elsewhere  discussed. 
Yet  notwithstanding  this  protest  of  jobbers  and  manufacturers 
in  eastern  trade  centres,  who  insisted  that  they  should  be 
permitted  to  compete  on  even  terms  with  provincial  jobbers 
by  making  their  shipments  direct  from  New  York  or  Boston 
in  small  lots  as  cheaply  as  the  local  jobber  could  buy  them  by 
the  carload,  the  number  of  separate  carload  ratings  steadily 
augmented  year  after  year.  By  1893  more  than  half  of  the 
articles  enumerated  in  the  Official  Classification  were  allowed 
a  lower  rate  for  large  shipments.  Present  conditions  are  set 
forth  by  the  statistics  in  the  preceding  paragraph.  From 
these  it  appears  that  in  trunk  line  territory  nearly  three- 
fourths  of  the  commodities  now  enjoy  carload  ratings;  while 
in  the  South,  on  the  other  hand,  only  about  one-fifth  of  them 
make  such  distinction  between  carload  and  less-than-carload 
lots.^  One  reason  is  evident;  namely,  that  throughout  a  large 
part  of  the  South  few  jobbers  command  a  business  of  sufficient 
magnitude  to  make  use  of  carload  shipments.  It  is  but  re- 
centl}^  to  take  a  specific  illustration,  that  business  has  de- 
veloped in  volume  sufficient  to  permit  of  the  shipment  of 
fly  paper  in  carload  lots.  Until  such  time  no  distinction 
between  large  and  small  shipments  could  well  be  made. 

Conditions  in  the  West,  according  to  these  figures,  are 
intermediate  between  those  in  the  East  and  the  South.  On 
the  other  hand,  transcontinental  business,  as  carried  on  in 
competition  with  ocean  steamers,  is  almost  entirely  confined  to 
shipment  by  the  carload.  The  Transcontinental  Classification 
is  unique,  therefore,  in  offering  but  very  few  opportunities 
for  shipment  by  package,  except  under  specially  onerous  con- 


1  Railways  in  the  United  States  in  1902,  I.C.C,  1903,  Part  II,  p.  39; 
In  the  South  in  1876  only  6  per  cent,  of  items  had  carload  ratings;  while 
in  1902,  65  per  cent,  were  so  favored,  as  compared  with  82  per  cent,  in 
trunk  hne  territory  and  81  per  cent,  in  the  West. 


312  RAILROADS 

ditions.  The  spread,  in  other  words,  between  the  two  sorts 
of  carriage  operates  most  unfavorably  by  contrast  upon  the 
intermountain  centres.  Denver,  for  example,  under  the  West- 
ern Classification  enjoys  no  carload  rates,  while  competitors 
at  San  Francisco  have  a  large  number.^ 

A  much  more  elaborate  code  of  rules  and  regulations  having 
reference  to  local  practices  and  conditions  is  the  third  accom- 
paniment of  the  growth  of  trade.^  Prior  to  1887,  and  again 
before  the  recent  revival  of  interest  in  uniform  classification, 
conditions  had  become  intolerable  in  this  regard.  All  sorts 
of  details,  covering  relatively  unimportant  differences  in  con- 
ditions of  carriage,  bill  of  lading  contracts,  marking  and  pack- 
ing, led  to  constant  confusion  and  annoyance,  especially  in 
cases  of  shipment  from  one  classification  territory  to  another. 
An  eastern  shipper  of  iron  bolts,  having  in  mind  that  a  gunny 
sack  is  equivalent  to  a  box  or  barrel  in  the  East,  orders  a  small 
shipment  in  a  bag  to  a  far  western  point.  He  finds  that  bolts 
in  bags  under  the  rules  of  the  Western  Classification,  are 
specially  enumerated  only  for  carload  lots,  and  that  he  must 
pay  a  rate  one  class  higher  for  such  shipment  than  if  contained 
in  a  barrel,  box  or  keg.  This  difference  in  classification  may 
more  than  absorb  his  profit.  Recent  evidence  before  the 
Interstate  Commerce  Commission,^  contained  a  striking  illus- 
tration of  such  local  diversity  in  rules  and  descriptions  as 
applied  to  furniture. 

"Western  class:  'Bank,  store,  saloon  and  office  furniture,  consist- 
ing of  arm  rails,  back  bar  mirrors,  bottle  cases,  chairs,  counter- 
fittings,  desk,  foot  rails,  metal  brackets  for  arm  and  foot  rails,  refrigera- 
tors, tables  and  work  boards.  Note  —  Door,  window  and  bar  screens, 
partitions,  prescription  cases,  patent  medicine  cases,  show  cases,  wall- 
cases  wainscoting,  office  railing  and  wooden  mantels  may  be  shipped 
with  bank,  store,  saloon  or  office  furniture  in  mixed  carloads  at  third- 
class,  minimum  weight  12,000  lbs. 

1  The  Intermountain  Rate  cases  are  fully  discussed  at  p.  610,  infrn. 
^  Samuel  O.  Dunn,  Railimy  Age  Gazelle,  September  10,  1909,  p.  462, 
is  best  on  this.     Cf.  8  I.C.C^.  Rep.,  368. 

^  Proposed  rate  advances  November  29,  1910. 


CLASSIFICATION  313 

"There  is  no  such  pro^^sion  as  this  in  the  Official  Classification. 
On  the  contrary,  a  shipment  of  that  kind  can  only  be  made  by  figuring 
out  the  less-than-carload  rate  on  each  article,  many  of  which  take  first, 
double  first  and  even  three  times  first  ratings. 

"  For  example,  mirrors  over  five  feet  in  length  are  classified  double 
first  class  in  the  official  classification,  while  show  cases,  set  up,  take 
three  times  first.  The  natural  result  of  this  difference  in  classification 
has  been  to  shut  out  competition  of  eastern  dealers  in  these  articles 
entirely  in  Western  Classification  territory." 

Only  in  a  customs  tariff  of  the  United  States  would  one  expect 
to  find  any  such  complexity  as  is  discoverable  in  railway 
documents  of  this  sort. 

The  mere  interpretation  of  such  classification  rules  is  often 
difiicult;  especially  with,  reference  to  the  mode  of  packing. 
Suppose  a  tariff  provides  a  certain  rate  on  stamped  metal 
ware  in  boxes,  barrels  or  crates  and,  furthermore,  fixes  the 
charge  fifty  per  cent,  higher  for  shipment  in  bales,  bags  or 
bundles.  If  the  consignment  is  encased  in  corrugated  straw- 
board,  which  of  the  two  rates  applies?  The  difference  in  rates 
being  so  great,  it  becomes  quite  an  item  on  a  shipment  of 
fifteen  carloads  from  Buffalo  to  the  Pacific  coast.^  Or  it  may 
be  a  question  as  to  whether  a  crate  for  Colorado  cantaloupes 
is  actually  of  such  dimensions  as  to  come  in  under  a  specially 
favorable  commodity  rate.^ 

The  growing  diversification  of  manufactures  and  trade  is, 
of  course,  responsible  for  all  three  of  the  developments  above 
indicated.  Not  only  the  increasing  refinement  of  commerce, 
but  the  technical  nomenclature  or  trade  jargon,  necessary  for 
the  specific  and  accurate  description  of  so  many  thousands 
of  articles,  have  conspired  to  render  these  documents  extremely 
cumbersome  in  the  absence  of  a  general  revision  and  simplifi- 
cation. It  is  but  natural  that  one  item  after  another  should 
be  added,  each  bearing  a  particular  name  or  being  classified 

»  22  I.  C.C.  Rep.,  565. 

2  22  I. C.C.  Rep.,  585.  Cf.  also  23  Idem,  395,  on  articles  too  large  to 
be  loaded  through  the  side  door  or  too  long  to  be  loaded  through  the  end 
window. 


314  RAILROADS 

upon  some  new  basis.  A  striking  example  of  this  increase  of 
complexity  was  afforded  by  the  cotton  goods  schedule  in  the 
Southern  Classification.  By  1900  there  were  upwards  of 
thirty  different  names  under  which  cotton  cloth  might  be 
shipped.  Great  complaint  was  occasioned,  as  well  as  the 
possibility  of  fraud,  by  underclassification,  etc.  Most  of  these 
thirty  names  did  not  represent  different  values  of  goods,  but 
in  many  instances  were  merely  trade-marks  of  particular 
manufacturers.  At  the  urgent  request  of  the  shippers  this 
complicated  schedule  was  superseded  in  1900  by  one  compre- 
hensive title  of  "cotton  goods  in  the  piece"  irrespective  of 
color,  particular  method  of  weaving  or  other  subordinate 
details. 

From  the  point  of  view  of  economic  theory,  the  warrant 
for  a  differentiation  of  charges  between  various  classes  of 
commodities  offered  for  transportation,  may  be  considered 
primarily  from  two  distinct  points  of  view.  The  first  is  that 
of  operation,  which  determines  cost.  The  second  is  from  the 
standpoint  of  traffic  whereby  the  value  of  service,  so-called,  is 
measured.  The  reasonableness  of  making  a  distinction  in 
freight  rates  according  to  the  character  of  goods  is  easily 
apparent,  as  judged  on  the  basis  of  cost  of  service.  A  multi- 
tude of  factors  enter  into  consideration  at  this  point.  The 
railway  ought  in  self-protection  to  charge  more  for  hauling 
a  thing,  if  it  actuall}'-  costs  it  more  in  the  long  run  to  perform 
that  service.  Some  of  the  factors  which  enter  into  this  cost 
were  well  put  by  the  Interstate  Commerce  Commission  in 
1897.1 

"Whether  commodities  were  crude,  rough,  or  finished;  liquid  or 
dry;  knocked  dovn\  or  set  up;  loose  or  in  buUc;  nested  or  in  boxes, 
or  otherwise  packed;   if  vegetables,  whether  green  or  dry,  desiccated 

1  Hammond,  Railway  Rate  Theories,  etc.,  1911,  p.  42,  analyzes  inter- 
state commerce  decisions  as  to  these.  Strombeck,  Freight  Classification, 
1912,  pp.  35-60,  also  discusses  the  various  factors  entering  into  cost. 


CLASSIFICATIOX  315 

or  evaporated;  the  market  value  and  shippers'  representations  as  to 
their  character;  the  cost  of  service,  length  and  direction  of  haul;  the 
season  and  manner  of  shipment;  the  space  occupied  and  weight; 
whether  in  carload  or  less-than-carload  lots;  the  volume  of  amiual 
shipments  to  be  calculated  on;  the  sort  of  car  required,  whether  flat, 
gondola,  box,  tank,  or  special;  whether  ice  or  heat  must  be  fiu-nished; 
the  speed  of  trains  necessary  for  perishable  or  other\\ase  rush  goods;  the 
risk  of  handUng,  either  to  the  goods  themselves  or  other  property; 
the  weights,  actual  and  estimated;  the  carrier's  risk  or  owner's  release 
from  damage  or  loss." 

Instances  of  approval  of  classification  on  the  basis  of  such 
cost  of  operation  are  frequently  found  in  the  decisions  of  the 
Interstate  Commerce  Commission.  For  example,  special  serv- 
ice or  equipment,  as  in  the  rapid  transport  of  fresh  vegetables 
and  fruit  from  the  South,  justify  the  carriers  in  a  specially 
high  classification.^  Rates  on  live  hogs  by  comparison  with 
rates  on  hog  products,  as  well  as  on  live  cattle  and  dressed 
beef,  have  likewise  been  adjusted  in  terms  of  cost  of  carriage. 
A  classification  on  hogs  j-ielding  a  rate  equal  to  two-thirds  of 
that  on  hog  products  has  been  held  equitably  to  represent 
the  relative  expense.  ^  Even  the  indefinite  element  of  risk 
has  been  accepted  as  justifying  a  higher  classification  for  live 
stock  as  compared  with  other  commodities.^ 

Classification  is  less  easy  to  defend  from  the  standpoint  of 
the  traffic  manager  alone,  than  from  that  of  the  vice-president 
in  charge  of  operation.  Value  of  service  is  at  times  difficult 
to  understand.  It  is  not  at  first  sight  reasonable,  that  of  two 
commodities  which  cost  the  raihvay  exactly  the  same  amount 
to  transport,  one  should  be  charged  twice  as  much  as  the 
other.  For  example,  the  rate  on  anthracite  coal  is  very  much 
higher  than  upon  soft  coal ;  the  rate  upon  wheat  is  higher  than 
the  rate  upon  some  other  foodstuffs;  the  rate  upon  fine  woollen 

1  6  I.C.C.  Rep.,  295;    10  Idem,  255. 

2  4  I.C.C.  Rep.,  611;  9  Idem,  382.  But  compare  23  Idem,  663,  fixing 
the  rate  on  stock  cattle  at  75  per  cent,  of  that  for  beef  or  fat  cattle.  How 
about  cost  of  ser^^ce  here? 

'  10  Idem,  327. 


316  RAILROADS 

goods  lis  very  much  higher  than  upon  coarse  cotton  cloth,  etc.^ 
It  has  been  urged  frequently  that  any  discrimination  in  the 
freight  rate  on  the  basis  of  difference,  either  in  the  value  of 
the  commodity  itself  or  in  the  value  of  the  service  rendered, 
is  unreasonable  and  unjust.  The  case,  however,  is  entirely 
analogous  to  that  of  discrimination  between  a  long  and  short 
haul  of  the  same  goods.  The  principle  is  perfectly  defensible 
in  both  cases,  and  has  been  accepted  in  legal  decisions  as  well 
as  by  economic  writers  for  many  years.  It  is  based  upon  the 
fact,  which  confronts  one  at  every  turn  in  a  discussion  of  rail- 
way economics,  that  a  large  proportion  of  the  expenses  of  a 
railway  is  independent  of  the  amount  of  traffic.  These  fixed 
expenses  must  be  met  at  all  cost  if  the  road  is  to  remain  solvent. 
They  constitute  a  charge  upon  the  entire  traffic  of  the  line, 
and  are  not  susceptible  of  apportionment  to  each  unit  of  trans- 
portation. Any  rate  which  will  contribute  a  surplus,  small  or 
large,  above  the  mere  cost  of  transportation,  —  that  is  to  say, 
above  the  expenses  incident  to  this  particular  carriage,  —  and 
which  thereby  lessens  by  the  amount  of  that  excess  the  burden 
of  the  fixed  charges  remaining  upon  other  traffic,  is  justifiable. 
But  it  is  defensible  only  under  two  conditions.  The  first  is 
that  the  goods  at  any  higher  rate  will  go  by  another  route  or 
not  at  all;  and  the  second  is  that  the  effect  may  not  be  detri- 
mental to  the  general  course  of  business, —  that  is  to  say,  that 
it  is  not  opposed  to  the  public  welfare.  Thus  a  long  haul  at  a 
lower  rate  than  the  rate  charged  for  a  shorter  haul,  if  it  must 
be  lower  in  order  to  secure  the  business,  constitutes  no  in- 
justice to  the  local  shipper;  for  the  surplus  remaining  above 
the  cost  of  haulage  of  that  particular  increment  of  freight 
lessens  thereby  the  charge  which  must  be  made  upon  local 
freight  for  meeting  interest  on  bonds,  maintenance  of  way, 
and  equipment  expenses,  etc.,  all  of  which  charges,  as  we  have 
seen,  go  on  more  or  less  independently  of  the  traffic.  On 
precisely  the  same  grounds  a  discrimination  of  freight  rates 
^  Cf.  revenue  per  ton  mile  by  commodities,  p.  421,  infra. 


CLASSIFICATION  317 

in  favor  of  the  cheaper  commodity  or  the  less  valuable  service 
may  be  defended.  Coal  or  sand  may  reasonably  be  carried 
at  two  and  one-fourth  mills  per  ton  mile,  while  the  road  is 
coincidently  charging  three  or  four  times  as  much  for  hauling 
dry  goods  or  fine  hardware.  For  if  a  quarter  of  a  mill  per  ton 
mile  can  be  earned  above  the  expenses  incident  to  hauling 
that  sand  or  coal,  it  enables  the  rates  on  the  dry  goods  or 
hardware  to  be  maintained  at  a  lower  point  than  they  other- 
wise would  be.  It  is  unnecessary  to  elaborate  this  principle 
further.  It  is  everjrwhere  accepted  as  valid.  And  it  in  a 
measure  substantiates  Mavor's  statement  that  "freight  rates, 
like  rent,  are  rather  the  effect  of  price  movements  than  the 
cause  of  them."  When  tariffs  are  high  because  prices  are 
high,  we  are  afforded  a  fair  illustration  of  value  of  service  as 
an  element  in  rate  making. 

Value  of  service,  therefore,  as  affording  a  warrant  for 
classification,  has  also  been  recognized  in  a  number  of  Inter- 
state Commerce  decisions  since  1887.  A  relation  between 
the  grade  of  the  charge  and  fluctuations  in  the  market  price 
of  the  commodity  —  in  other  words,  charging  what  the  trafl&c 
will  bear  —  is  at  times  discernible.  It  is  to  the  interest  of  the 
public  that  carriers  should  be  satisfied  with  relatively  smaller 
profits  from  the  transportation  of  commodities  of  low  price 
which  are  in  general  demand.^  Under  these  circumstances 
changes  in  price  of  such  staple  commodities  as  iron  and  steel 
or  the  lower  priced  grains,  should  be  reflected  in  a  correspond- 
ing modification  of  rates.^  Akin  to  this  is  recognition  of  a 
relation  in  general  between  the  value  of  a  commodity  and  its 
classification.  Where,  for  example,  articles  representing  differ- 
ent stages  of  manufacture  have  to  be  graded,  it  is  but  fair  that 
the  raw  material,  or  the  partly-made  product  should  be  graded 


^  Cf.  p.  412,  infra,  on  the  significance  of  revenue  per  ton  mile. 

2  6  I.C.C.  Rep.,  88;  9  Idem,  382;  4  Idem,  48.  On  freight  rates  and 
prices  compare  Rep.  U.  S.  Industrial  Commission,  XIX,  p.  366,  and  chap. 
X,  infra. 


318  RAILROADS 

lower  than  the  finished  article.^  Similarly,  articles  which  may 
fairly  be  substituted  for  one  another  ought  to  be  classified  with 
reference  to  their  common  market  value. ^  The  relative  value 
of  commodities,  as  controlling  classification,  clearly  governs 
the  treatment  of  hard  and  soft  coal.^  The  practical  difficulty, 
of  course,  is  to  know  where  to  stop  in  admitting  such  consid- 
erations. Shall  "small-vein"  soft  coal,  because  it  cannot 
compete  on  even  terms  with  the  "big-vein"  product,  be  ac- 
cepted for  carriage  on  a  more  favored  basis?  *  Some  rather 
nice  questions,  both  of  business  and  public  policy,  would  be 
suggested  by  such  a  precedent. 

Different  classification  of  the  same  commodity  according 
to  the  use  to  which  it  may  be  put,  is  evidently  an  attempt  to 
grade  according  to  value  rather  than  cost  of  service.  Auto- 
mobile parts  may  come  in  from  the  wheelmaker  at  second- 
class  rates,  but  when  they  go  out  to  jobbing  houses  they  are 
rated  three  times  first  class.^  A  number  of  cases  of  this  sort 
have  come  before  the  Commission.  Shall  cow  peas,  for  ex- 
ample, be  classed  with  corn  and  oats  as  agricultural  products 
in  one  case,  while  according  them  a  rating  with  commercial 
fertilizers  in  another,  inasmuch  as  they  may  become  an  active 
agent  in  nitrogenizing  soil?  ^  More  recently  the  Commission 
has  declined  to  recognize  the  vahdity  of  classification  on  this 
basis.  Thus  brick  is  always  to  be  charged  the  same  without 
regard  to  whether  it  is  for  fire,  building  or  paving  purposes.^ 
Unusually  low  rates  for  steam  coal  used  by  carriers  and  open 
only  to  certain  shippers  for  this  or  other  particular  purposes, 
likewise  have  been  forbidden.^     The  carriers  have  attempted 

1  Hammond,  Railway  Rate  Theories,  p.  14  et  seq. 

2  Ibid.,  pp.  27  and  36. 

3  Ibid.,  p.  29. 

4  14  I.C.C.  Rep.,  127. 

^  Freight,  February,  1905,  p.  61. 
«  10  I.C.C.  Rep.,  281. 

^  17  I.C.C.  Rep.,  197.     But  compare  23  Idem,  7,  on  stock  and  fat  cattle; 
and  14  Idem,  127,  on  "big-vein"  and  "small-vein"  coal,  as  above. 
8  20  I.C.C.  Rep.,  426;   21  Idem,  41. 


CLASSIFICATION  319 

to  distinguish  in  grade  between  dried  fruit  and  raisins.  For 
the  two  industries  call  for  relatively  different  protection  against 
old-established  competitors.^ 

As  actually  effected  in  practice,  classification  of  freight 
seems  to  have  been  largely  empirical  —  the  result  of  long  ex- 
perience in  sympathetically  feeling  the  pulse  of  the  business 
community.  In  the  main,  despite  their  denial  of  the  validity 
of  cost  as  an  element  in  rate  making,  traffic  managers  and  the 
Interstate  Commerce  Commission  seem  to  have  been  swayed 
more  commonly  by  this  consideration  in  the  make-up  of  sched- 
ules. Nevertheless,  charging  what  the  traffic  will  bear,  as  a 
principle,  will  suffice  alone  to  explain  many  of  the  details  of 
classification  now  in  force.  Rates  have  been  adjusted  so  as 
to  secure  the  largest  amount  of  business  possible  at  the  highest 
rate  compatible  with  that  volume.  In  other  words,  traffic 
managers  have  been  mainly  influenced  by  the  consideration 
well  stated  by  a  witness  before  the  United  States  Industrial 
Commission:  that,  "a,  freight  tariff  is  made  as  it  is,  not  because 
it  ought  to  be  that,  but  because  it  must  be  that."  The  pro- 
cedure of  classification  committees  seems,  in  other  words,  to 
have  been  mainly  based  upon  considerations  of  revenue,  and 
that,  too,  without  any  very  positive  evidence  as  to  details.^ 
Rule-of-thumb  experience,  therefore,  is  mainly  represented 
in  classifications  of  the  present  time;  that  is  to  say,  an  adjust- 
ment of  freight  rates  upon  different  commodities  to  suit  the 
commercial  conditions  which  have  happened  to  prevail  at 
any  given  time.  All  of  which  emphasizes  still  further  the 
need  of  scientific  revision  of  these  most  important  schedules, 
preferably  by  the  carriers  themselves,  but  by  public  authority 
if  commercial  inertia  be  too  powerful  to  be  overcome. 

The  spread  of  a  classification,  —  that  is  to  say,  the  gradu- 
ation of  rates  as  between  all  kinds  of  goods,  from  fine  silks 

1  2  Idem,  1. 

^  Evidence   before    the    Interstate    Commerce    Commission    and    the 
Industrial  Commission  as  to  freight  rate  advances  in  1900  proves  this  point. 


320  RAILROADS 

to  lime  and  sand,  or  from  aeroplanes,  "set  up,"  to  pig  iron, 
"knocked  down,"  —  is  not  constant.  How  shall  this  be  theo- 
retically justified?  At  first  sight  it  would  appear  as  if  the 
relativity  of  charges  between  different  things,  as  determined 
by  cost  or  value  of  service,  ought  to  remain  fixed;  that  is  to 
say,  for  example,  that  rates  on  raw  hides  fairly  standing  at 
one-half  of  the  charge  for  shoes,  ought  to  remain  always  and 
everywhere  at  this  ratio.  Advocates  of  a  rigid  classification 
prescribed  by  public  authority  seem  often  to  assume  that  this 
could  be  brought  about.  But  a  moment's  consideration  of 
the  nature  of  a  tariff  as  it  has  already  been  described  will  show 
that  this  is  impossible.  The  spread  or  gradation,  far  from 
being  fixed,  must  in  the  nature  of  things  ever  vary  from  place 
to  place  with  change  of  trade  conditions.  The  rate  on  raw 
hides  relatively  to  that  on  shoes  in  New  England  —  the  centre 
of  manufacture  for  footwear  —  should  be  very  different  at 
Kansas  City  or  Chicago,  whence  the  raw  hides  are  derived: 
different  alone,  if  for  no  other  reason  than  because  hides, 
moving  east,  progressively  add  the  cost  of  carriage  the  farther 
they  go;  while  with  shoes  the  augmentation  of  value  goes  on 
in  the  opposite  direction,  geographically.  True  as  between 
commodities,  the  same  inconstancy  of  ratio  also  holds  good  as 
between  different  points  along  a  given  line.  The  rate  from  New 
York  to  Durham,  North  Carolina,  for  example,  on  first-class 
freight  may  be  fifteen  per  cent,  above  that  for  freight  of  the  sec- 
ond class;  the  second  class  maybe  twenty  per  cent,  above  that  of 
third  class  for  this  distance,  etc.;  yet  the  divergence  between 
these  same  classes  for  another  distance,  as  between  New  York 
and  Jacksonville,  Florida,  may  be  quite  different,  —  twenty 
per  cent,  between  first  and  second  class,  twenty-seven  per  cent, 
between  second  and  third,  and  so  on.  This  is  indeed  rather  a 
difficult  matter  to  understand. 

This  ever-changing  spread  of  rates  from  place  to  place,  as 
between  different  commodities  and  with  all  possible  combina- 
tions of  the  two,  may  be  clearly  explained  by  reference  to  the 


CLASSIFICATION  321 

diagram  at  page  108,  showang  the  gradation  of  charges  by- 
distance  for  different  goods.  Is  it  not  plain  that  the  spread 
between  commodities  at  any  given  place  is  indicated  by  taking 
a  vertical  cross  section  of  the  diagram  at  that  point?  We 
have  already  seen  that  the  curves,  rising  with  increase  of  the 
distance,  do  so  by  different  degrees.  They  cross  and  recross, 
making  an  intricate  lace  work  of  lines,  because  of  the  fact  that 
while  cost,  in  general,  may  increase  more  or  less  proportionately 
to  distance,  competition  in  its  ever-varying  forms,  plays  all 
sorts  of  pranks  with  the  rates  from  point  to  point.  The  rate 
at  any  station  is  shown  by  the  height  of  the  curve  on  the 
vertical  line  for  that  place.  Even,  however,  if  the  curves  never 
crossed,  but  rose  by  evenly  spraying  out  from  the  point  of 
shipment  at  one  end  of  the  line,  as  in  the  case  of  those  for  the 
three  upper  classes,  their  relative  heights  would  constantly 
change  with  distance.  But  owing  to  the  complexities  of  com- 
petition the  onward  and  upward  movement  of  the  curves  for 
particular  commodities  is  usually  much  more  erratic  than  this. 
Some  goods,  like  children,  "get  their  growth"  early.  They 
soon  attain  the  level  of  all  the  charge  they  can  ever  bear. 
Others  distribute  their  development  over  a  much  greater 
distance.  Sometimes,  as  w^e  have  observed,  the  coal  curve 
will  be  above  the  wheat  curve;  sometimes  it  will  be  below. 
In  other  words,  the  vagaries  of  these  sloping  lines  cause  the 
vertical  cross  sections,  indicative  of  spread,  to  vary  from  point 
to  point  all  along  the  line.  Such  a  thing  as  constancy  of  ratio 
between  classes  or  particular  goods  is,  in  the  nature  of  trans- 
portation things,  unpossible.  This  is  a  matter  of  fundamental 
importance,  especially  in  its  bearing  upon  the  proposition, 
soon  to  be  considered,  of  substituting  a  single  uniform  classi- 
fication under  government  authority  for  the  present  threefold 
system.  Moreover,  it  demonstrates  the  great  commercial 
disturbance  which  might  ensue  from  a  general  advance  of 
freight  rates  by  an  indiscriminate  transfer  of  commodities  from 
lower  to  higher  classes,  such  as  was  attempted  in  1900.     Such 

VOL.  I — ^21 


322  RAILROADS 

procedure  is  altogether  illogical,  and  economically  as  upsetting 
to  trade  as  a  general  "horizontal"  increase  or  reduction  of  a 
customs  tariff. 

Commodity  rates  as  a  means  for  enabling  shippers  to  reach 
beyond  their  immediate  territory  and  gain  an  entrance  to 
new  markets,  form  an  entirely  distinct  variety  of  charges  from 
those  quoted  in  the  classified  tariffs.  These  are  special  rates 
made  to  suit  particular  contingencies,'^  although,  of  course, 
under  the  law  they  must  be  filed  with  the  Interstate  Com- 
merce Commission  in  the  same  manner.  Such  commodity 
rates,  however,  do  not  apply  to  persons  but  to  localities.  Al- 
though granted  to  shippers  in  a  particular  place  to  build  up 
an  industry,  the  privilege  of  shipment  under  the  same  condi- 
tions is  theoretically  open,  of  course,  to  all  others  at  that 
point.  Such  commodity  rates  naturally  apply  to  three  sets 
of  commercial  conditions:  they  either  govern  large  shipments 
for  long  distances,  as  in  the  case  of  live  stock;  or,  if  for  short 
distances,  they  are  confined  to  commodities  of  the  very  lowest 
grade,  such  as  hme,  sand  or  paving  blocks;  or  else  they  are  intro- 
duced to  meet  special  conditions,  such  as  an  irregular  market  or 
rapidly  fluctuating  competitive  circumstances,  as  in  the  case 
of  goods  for  import  or  export.  Such  special  rates  are  almost 
invariably  granted  for  carload  lots  alone.  The  reason  is, 
naturally,  that  it  would  not  be  worth  while  to  make  an  excep- 
tion to  the  classified  schedules  for  less  than  that  amount. 
Moreover,  it  should  be  observed,  special  rates  of  this  sort  are 
often  introduced  in  order  to  meet  changeable  competition, 
such  as  by  steamship  Unes  engaged  in  export  or  import  business. 
The  classified  ratings  change  but  little,  and  oftentimes  remain 
the  same  for  many  years.  But  in  all  cases  where  fluctuating 
conditions  have  to  be  met,  commodity  rates  by  the  carload 
are  likely  to  appear.  This  is  one  reason  why  the  transconti- 
nental tariffs,  exposed  to  competition  either  by  the  Cape  Horn 
1  Pp.  108,  118,  etc.,  supra. 


CLASSIFICATION  323 

or  Panama  water  routes,   contain  so  large  a  proportion  of 
commodity  or  carload  ratings.^ 

Exceptional  or  commodity  rates  are  also  commonly  found 
in  a  territory  like  the  southern  states,  where  manufactures 
are  struggling  to  maintain  a  foothold.  If  it  appear  that  a 
new  industry  can  maintain  itself  in  competition  with  already 
established  industries  elsewhere  only  by  a  concession  in  charges, 
the  traffic  manager  may  elect  to  grant  a  commodity  rate  until 
such  time  as  the  industry  has  been  placed  firmly  upon  its  feet. 
The  tonnage  moving  under  commodity  rates  in  such  circum- 
stances may  be  much  greater  than  that  included  under  the 
classified  schedules.  Attention  has  already  been  drawn  to 
this  fact,  but  it  merits  still  further  comment.  Probably  three- 
fourths  of  the  business  of  American  railways  is  done  under 
such  special  rates.  This  is  apparently  a  higher  proportion 
than  rules  in  foreign  countries  with  the  possible  exception  of 
England.  Yet  it  is  important  to  notice  that  the  revenue 
obtained  from  such  traffic  is  relatively  much  less  than  the  ton- 
nage, inasmuch  as  most  commodity  rates  are  confined  to  low- 
grade  goods.  Whether  such  exceptions  to  the  classified  tariffs 
are  on  the  increase  or  not  is  open  to  question.  The  evidence 
tends  to  show  that  special  rates  granted  in  connection  with 
industrial  development  tend  to  increase  up  to  a  certain  point. 
Commodity  rates,  for  example,  are  said  to  be  much  more  im- 
portant in  the  West  than  they  were  fifteen  years  ago.^  But, 
on  the  other  hand,  industrial  conditions  having  once  become 
standardized  and  assured,  the  natural  disposition  of  the  railways 
is  to  substitute  regular  schedules  for  a  multiplicity  of  special 
rates.  The  dilemma  is  that  such  a  special  rate  once  allowed, 
is  exceedingly  difficult  to  withdraw.  An  earnest  attempt  was 
made  by  the  trunk  lines  in  1899  to  retire  a  large  number  of 
these  commodity  rates.     It  then  appeared  that  the  New  York 

1  Sixteenth  Annual  Report  I.C.C,  32;  19  I.C.C.  Rep.,  244;  21  Idem, 
349  and  418. 

2  18  I.C.C.  Rep.,  459. 


324  RAILROADS 

Central  &  Hudson  River  Railroad  had  no  less  than  1,370  on 
file.  Opposition  naturally  arose  to  the  cancellation  of  these  — 
an  opposition  less  easily  overcome  because  of  the  complication 
that  the  withdrawal  of  commodity  rates  meant  practically 
the  abolition  of  carload  ratings.  Such  action,  therefore,  look- 
ing toward  simplification  of  tariffs,  threatened  substantially 
to  disturb  all  the  existing  commercial  adjustments.  Never- 
theless it  is  encouraging  to  note  that  a  distinct  reduction  in  the 
number  of  separate  and  independent  rates  put  into  effect  is 
apparent  since  the  recent  extensions  of  Federal  authority.  The 
following  table,  covering  the  tariffs  officially  filed  at  Washington 
since  1906,  is  proof  positive  of  great  improvement  in  this  regard: 

Freight  Schedules  Filed  with  the  Interstate  Commerce 
Commission 

1896    131,597 

1906  193,995 

1907  187,041 

1908  161,584 

1909  129,294 

1910  109,550 

1911    93,821 

A  reduction  of  more  than  one  half  within  five  years  is  matter 
for  public  congratulation.^ 

Special  or  commodity  rates  for  the  maintenance  of  equilib- 
rium between  competing  markets  fall  naturally  into  several 
distinct  groups. ^  In  the  first  of  these,  concerning  commodity 
rates  on  grain  and  grain  products  and  cotton,  production  takes 
place  over  a  vast  extent  of  territory  and  the  products  are 
marketed  in  places  widely  remote  from  one  another.  The 
problem  under  such  circumstances  is  mainly  that  of  securing 
equalization  through  different  gateways.''  In  the  case  of 
wheat  it  is  a  question  first  of  concentration  at  primary  markets, 

1  Cf.  Annual  Report,  I.C.C,  1909,  p.  11. 

2  McPhcrson,  Railroad  Freight  Rates,  pj).  117-148,  is  good  on  this. 
'  Cotton  pools  in  the  South;  cf.  vol.  II. 


CLASSIFICATION  325 

such  as  St.  Paul,  Kansas  City,  or  Chicago;  and  thereafter  of 
carriage  by  competitive  routes  whether  by  the  way  of  the  Gulf,  by 
any  of  the  various  Atlantic  seaports  or  by  the  St.  Lawrence 
River.  Commodity  rates  are  thus  determined  in  this  first 
class  of  cases  mainly  with  references  to  competition  of  routes. 
On  the  other  hand,  when  production  is  spread  over  a  consider- 
able territory,  but  when  transportation  is  thereafter  effected 
along  converging  lines  to  a  fairly  locahzed  centre  of  manu- 
facture, the  problem  of  equahzing  conditions,  competitively, 
by  the  resort  to  commodity  rates,  has  mainly  to  do  with  com- 
petitive conditions  at  the  place  of  production.  Rates  on  wool 
to  the  highly  localized  markets  of  the  world  afford  illustration 
of  this  second  t}T3e  of  commodity  rate  problem.^  Commod- 
ity rates  upon  fruits  and  vegetables  to  common  markets 
from  such  widely  separated  sources  of  supply  as  Florida 
and  California  or  the  equilibration  of  conditions  of  produc- 
tion for  coal  or  lumber  from  the  most  widely  scattered 
sources  of  supply,  are  perhaps  the  most  difficult  of  all  to 
settle  satisfactorily. 

The  amount  of  reduction  to  be  allowed  on  shipments  by 
carload  as  against  consignments  in  small  lots  is  a  nice  and  most 
perplexing  problem  in  classification.  Attention  has  already 
been  directed  to  the  great  increase  in  distinct  carload  ratings 
which  has  accompanied  the  development  of  trade.  As  affecting 
the  interests  of  shippers  in  different  parts  of  the  country,  the 
question  came  up  almost  immediately  after  the  passage  of  the 
Act  to  Regulate  Commerce.  In  the  so-called  New  York  Board 
of  Trade  case,^  complaint  was  entered  by  eastern  merchants 
against  a  great  increase  in  the  number  of  wholesale  ratings  in 
1888.  More  than  five  times  as  many  commodities  as  before 
were  abruptly  given  lower  rates  when  shipped  out  of  New  York 

^  23  I.C.C.  Rep.,  151,  investigating  the  transportation  of  wool  affords 
a  fine  example. 

2  3  I.C.C.  Rep.,  473. 


326  RAILROADS 

by  the  carload.  Inasmuch  as  a  very  large  proportion  of  gro- 
ceries and  other  supplies  went  by  box  or  package,  this  reduction 
accorded  on  carload  shipments  greatly  benefited  the  jobbers 
all  through  the  West  and  South.  Under  new  conditions  pro- 
vincial middlemen  could  buy  in  carloads;  and  then  re-dis- 
tribute from  local  centres  much  more  advantageously  than 
before.  The  Commission,  called  upon  to  decide  as  to  the 
relative  rights  of  these  two  classes  of  jobbers,  attempted  to 
bring  about  an  adjustment  which  should,  in  the  main,  conform 
to  the  existing  trade  conditions;  and  yet  should  take  into 
consideration  the  relative  cost  of  service  in  the  two  cases.  The 
competitive  struggle  between  eastern  and  both  southern  and 
western  dealers  revealed  in  these  early  proceedings,  has  cropped 
out  continually  in  official  proceedings  ever  since  that  time. 
In  a  modified  form  the  same  question  came  to  the  front  in  con- 
nection with  the  general  advance  of  freight  rates  in  1900.^ 
The  changes  at  this  time  were  twofold  —  not  only  modifica- 
tions in  the  number  of  carload  ratings,  but  also  an  altered 
differential  or  spread  between  the  charges  for  the  two  sorts  of 
shipments.  The  question  is  a  vital  one  to  all  the  shipping 
interests  of  the  country.  It  is  one  of  the  most  troublesome 
elements  in  the  establishment  of  a  uniform  classification  for  the 
United  States  as  a  whole.  For  inability  to  standardize  reason- 
able differences  between  carload  and  small  shipments,  under 
the  widely  different  trade  conditions  and  practices  in  various 
sections  of  the  country,  is  an  almost  insuperable  difficulty  in 
the  way  of  that  reform. 

The  economic  justice  of  allowing  a  carload  shipper  lower 
rates  than  one  who  ships  in  small  lots  is  apparent,  on  account 
of  the  difference  in  the  cost  of  such  service  to  the  railways. 
This  has  been  recognized  by  the  Interstate  Commerce  Commis- 
sion and  the  courts  as  beyond  question.  Not  only  the  amount 
of  paying  freight  in  relation  to  dead  weight;  but  the  cost  of 
loading  and  unloading,  of  billing  or  collection  and  of  adjusting 
*  United  States  Industrial  Commission,  XIX,  1901,  p.  281. 


CLASSIFICATION  327 

damages  —  all  of  these  elements  of  cost  are  noticeably  less  in  the 
case  of  a  full  carload.  Turning  from  these  considerations  of 
cost  to  those  prescribed  by  what  may  be  called  traffic  principles, 
the  difficulty  in  arriving  at  a  just  determination  may  be  easily 
appreciated.  Glass  battery  jars  in  less-than-carload  lots  were 
at  one  time  charged  from  New  York  to  Atlanta,  Georgia, 
second-class  rates,  namely  ninety-eight  cents  per  one  hundred 
pounds.  The  same  commodity  when  in  carload  shipments 
(not  less  than  20,000  pounds)  was  rated  as  fifth  class;  in  which 
case  the  charge  from  New  York  to  Atlanta  became  sixty  cents. 
Here  was  a  plain  difference  of  thirty-eight  cents  per  one  hundred 
pounds  —  upward  of  sixty  per  cent,  greater  charge  —  to  the 
small  shipper  whose  business  or  capital  was  insufficient  to 
warrant  shipments  to  such  an  amount.  Two  results  of  such 
discrimination  are  possible.  In  the  first  place,  the  large  shipper 
is  enabled  to  undersell  his  smaller  competitor  and  perhaps  to 
drive  him  out  of  that  class  of  business.  This  may  take  place 
as  between  two  dealers,  both  located  in  the  South  and  buying 
their  supplies  from  New  York.  The  second  result  is  that  under 
such  rates  it  is  impossible  for  the  manufacturer  or  northern 
jobber  to  sell  direct  from  New  York  to  the  retailer  in  the  South 
in  competition  with  the  provincial  jobber  there  located,  who 
ships  his  goods  in  at  the  cheap  carload  rate  and  distributes 
them  thereafter.  The  problem  thus  concerns  at  the  same  time 
both  the  small  local  shipper  or  dealer,  as  against  a  more  for- 
midable provincial  competitor;  and  also  the  remote  jobbers 
as  a  class  against  the  whole  group  of  local  middlemen.  In  the 
latter  case,  sometimes,  as  in  the  South,  the  question  is  still 
further  compHcated  by  a  basing  point  system,  under  which 
the  provincial  jobber  re-distributes  to  the  country  stores  the 
goods  which  have  already  been  shipped  in  on  a  low  carload 
rate.^  And,  locally,  there  is  also  the  immanence  in  the  South 
of  water  competition  by  sea  and  river  to  be  kept  in  mind. 
Boat  charges  are  based  upon  space  requirements  rather  than 

1  P.  387,  infra. 


328  RAILROADS 

weight.  This  introduces  further  important  considerations  in 
fixing  the  spread  of  charges. 

The  problem  as  it  affects  the  manufacturer  is  akin  to  that 
concerning  the  jobber.  Originally,  as  a  matter  of  fact,  the  car- 
load reduction  was  essentially  a  manufacturers'  rating,  espe- 
cially for  goods  in  which  the  cost  of  raw  material  formed  a 
large  part  of  the  price  of  the  finished  product.  The  relations 
of  the  carload  rate  on  the  former  to  the  less-than-carload  rate 
on  the  latter,  it  is  obvious,  may  readily  become  an  important 
element  in  industrial  success.  It  is  plain  enough  that  carload 
charges  under  such  circumstances  should  be  substantially  less 
than  those  upon  small  consignments;  but  that  is  far  from 
affording  a  satisfactory  answer  to  the  question  as  to  the 
proper  spread  or  difference  in  charge  to  be  allowed  between 
the  two. 

Obviously,  in  any  representation  as  to  the  reasonableness  of 
the  discount  which  shall  be  allowed  on  carloads,  either  on  the 
basis  of  cost  or  of  traffic  principles,  the  interests  of  localities 
are  commercially  pitted  one  against  another.  The  New  York 
or  Chicago  jobbing  house  desiring  to  sell  its  goods  directly  to 
the  retailers  throughout  the  West,  wishes  to  have  a  relatively 
low  rate  on  such  small  shipments  as  the  retailers  in  lesser 
places  alone  can  afford  to  purchase.  Participation  in  this 
distributing  business,  however,  is  resented  by  the  middlemen 
located  in  western  centres  —  Omaha,  Denver,  Kansas  City, 
etc.  —  who  all  insist  that  there  should  be  so  wide  a  difference 
between  carload  and  less-than-carload  rates  that  they  may 
ship  in  their  wholesale  purchases  at  a  low  rate,  and  thus  com- 
pete in  their  own  territory  with  the  manufacturer  in  the  East  or 
the  jobber  in  New  York  who  desires  to  sell  direct.^  Compari- 
son of  the  classifications  in  different  parts  of  the  country  reveals 
the  influence  of  these  local  interests.  The  railways  in  Official 
Classification  territory  desire,  of  course,  to  build  up  the  manu- 
facturing and  jobbing  cities  tributary  to  them.     This  can  best 

1  Cf.  testimony  of  Wicker  before  the  Cullom  Committee  in  1886. 


CLASSIFICATION  329 

be  done  by  encouraging  the  growth  of  eastern  jobbing  centres, 
stimulated  by  as  low  rates  for  retail  as  for  wholesale  shipments. 
The  railways  in  the  western  and  southern  territory,  on  the 
contrarj'^,  are  obliged  to  consider  the  claims  of  their  constituents, 
and  to  correspondingly  minimize  the  advantages  which  foreign 
competitors  of  their  local  wholesale  dealers  enjoy.  Another 
consideration  must  also  be  kept  in  view,  namely,  that  carload 
ratings  can  only  be  accorded  when  business  has  developed  a 
magnitude  sufficient  to  permit  shipments  of  that  size.  The 
growth  of  the  volume  of  business  in  general,  therefore,  might 
be  normally  expected  to  produce  an  increase  in  the  proportion 
of  carload  ratings.  Experience,  as  we  have  seen,  confirms  this 
view.  The  normal  development,  then,  is  toward  an  increase 
in  the  number  of  lower  rates  quoted  for  carload  lots.  This  is 
retarded  only  by  the  influence  of  the  jobbers  and  manufacturers 
in  the  eastern  trade  centres,  who  insist  that  they  shall  be  per- 
mitted to  compete  on  even  terms  with  provincial  middlemen 
by  making  their  shipments  direct  in  small  lots  at  rates  approx- 
imately as  low  as  the  local  jobbers  pay  on  carload  lots.  This 
question  is  an  exceedingly  important  one,  requiring  the  balance 
of  opposing  interests  to  a  nicety. 

Not  unfamiliar  aspects  of  the  problem  of  carload  rating  are 
revealed  in  a  recent  case  before  the  Interstate  Commerce  Com- 
mission, concerning  milk  rates  in  New  England.^  And  yet  the 
normal  order  is  reversed.  Usually,  complaint  is  made  of  the 
denial  of  carload  ratings.  In  this  instance  a  plea  was  entered 
for  a  useable  small  unit  rate  as  against  the  wholesale  charge. 
The  dispute  was  precipitated  by  a  deadlock  in  1910  between 
the  three  large  Boston  milk  contractors  and  the  farmers' 
associations  of  several  states.  The  producers,  failing  in  their 
demand  for  an  increased  price,  declined  to  furnish  milk  at  the 
old  figure.  A  famine  resulted,  which  drew  the  attention  of 
the  public  sharply  to  the  system  under  which  the  Metropolitan 
district  of  Boston  was  supplied.  The  beUef  prevailed  that  the 
1  22  I.C.C.  Rep.,  303. 


330  RAILROADS 

peculiar  transportation  conditions  known  as  the  "leased  car 
system"  which  had  existed  for  half  a  century,  was  mainly 
responsible  for  the  tight  monopoly  of  the  milk  supply.  Under 
this  arrangement  specially  low  charges  were  allowed  to  those 
who  made  shipments  regularly  by  the  carload.  The  Massa- 
chusetts legislature,  after  an  investigation,  finally  passed  a  law 
providing  that  no  carrier  should  charge  more  for  the  transpor- 
tation of  milk  by  the  can  than  was  charged  for  larger  quantities; 
and  also  that  the  same  facilities,  icing,  for  example,  should  be 
furnished  in  the  one  case  as  in  the  other.  This  settled  the 
intra-state  charges;  but  it  left  matters  as  before  for  all  the  other 
New  England  states  contributing  to  the  market.  In  this 
form  the  controversy  was  brought  before  the  Federal  authorities, 
which  exhaustively  considered  the  methods  of  transportation 
as  affecting  all  parties  concerned.  The  contrast  with  the  older 
elastic  situation  as  to  milk  ratings  in  New  York  was  sharp  in 
many  respects.^  This  earlier  controversy  had  to  do  mainly 
with  the  relative  rights  of  nearby  and  distant  producers.  It 
was  a  question  of  the  element  of  distance  as  affecting  a  local  or 
territorial  monopoly.  The  Boston  case,  on  the  other  hand, 
was  rather  a  matter  of  carload  ratings  than  of  graduation  of 
charges  according  to  the  length  of  the  haul.  The  monopoly  in 
this  instance  was  that  of  contractors  who  had  succeeded  in 
getting  entire  control  of  the  business  by  reason  of  the  wide 
spread  between  charges  for  milk  by  the  can  and  by  the  "leased 
car."  Shipments  by  the  can  from  the  independent  farmer 
were  rendered  practically  impossible  since  they  had  to  be 
carried  in  the  baggage  car  and  were  liable  to  spoil  through 
lack  of  refrigeration. 

By  contrast  with  the  New  York  "open  car  system,"  the 
New  England  plan  from  the  standpoint  of  cost  of  service  alone 
seemed  to  offer  several  advantages.  A  caretaker,  hired  by 
the  milk  contractor  and  in  constant  personal  touch  with  the 
farmers,  exercised  supervision  both  over  milk  and  cans;  this 
1  7  I.C.C.  Rep.,  92. 


CLASSIFICATION  331 

insured  a  heavier  loading  and  more  prompt  service  at  terminals; 
resulted  in  the  operators  providing  the  best  facilities  for  hand- 
ling the  supply;  and  allowed  surplus  milk  to  be  directed  to 
other  uses  without  waste.  A  large  investment  had  been  made 
under  this  system,  dependent  upon  its  continuance  for  a  reason- 
able return.  On  the  other  hand,  denial  of  equally  low  rates 
with  the  same  facilities  for  refrigeration  to  the  single-can 
shipper,  had  undoubtedly  fostered  monopoly.  The  railways, 
conforming  to  the  new  Massachusetts  law  above  mentioned, 
offered  to  furnish  and  operate  a  car  suitable  for  independent 
shippers  on  condition  that  six  hundred  cans  should  be  tendered 
for  shipment.  But  they  denied  obligation  to  furnish  icing 
facilities,  which  latter,  of  course,  were  absolutely  necessary  for 
the  success  of  the  competitive  service.  To  be  sure,  the  leased 
car  controlled  by  the  contractors  had  been  theoretically  open 
to  all,  on  condition  of  a  small  charge  for  icing;  but  the  farmers 
contended  that  independent  shippers  ought  not  to  be  com- 
pelled thus  to  deliver  over  their  property  into  the  hands  of 
competitors,  with  the  accompanying  exposure  of  their  business 
relations.  In  the  light  of  all  these  complications  the  Com- 
mission decided  that  a  per  can  rate  with  the  necessary  refrig- 
eration, and  bearing  a  proper  relation  to  the  carload  rate, 
ought  to  be  established.  And  there  the  matter  rests  at  this 
time. 

The  problem  of  mixed  carloads,  also,  is  a  difficult  one  to 
adjust  to  the  needs  of  primary  and  secondary  distributing 
points.^  It  is  oftentimes  of  vital  importance  to  a  small  jobber 
to  be  able  to  make  up  a  carload  of  miscellaneous  packages.  His 
business  may  not  be  large  enough  to  permit  him  to  enjoy  the 
advantage  of  a  carload  rate  on  any  single  commodity.  Or  the 
independent  meat  packer  may  be  greatly  benefited  by  a  rule 
which  permits  him  to  bulk  his  soap  and  other  by-products 

1  Samuel  O.  Dunn,  Railway  Age  Gazette,  September  10,  1909,  p.  463. 
Cf.  12  I.C.C.  Rep.,  510;   9  Idem,  440;   and  23  Idem,  504. 


332  RAILROADS 

with  other  goods  in  securing  a  wholesale  rate.  Why  may  a 
paper  manufacturer  not  combine  paper  bags  and  wrapping 
paper  in  one  territory  as  well  as  another?  In  this  regard  the 
rules  in  the  West  and  South  are  naturally  much  less  liberal 
than  in  the  East.  The  privilege  of  mixture  has  been  given 
only  to  a  limited  extent  to  jobbing  and  manufacturing  centres 
by  means  of  commodity  tariffs.  Such  mixture  is  usually  re- 
stricted to  analogous  articles,  such  as  agricultural  implements, 
furniture  or  commodities  intended  to  serve  a  joint  purpose. 
The  recent  bitter  protest  against  the  discontinuance  of  the 
right  to  ship  binder  twine  with  agricultural  implements  is  a 
case  in  point.  On  the  other  hand,  eastern  railways  are  a  unit 
in  opposing  the  bulking  of  separate  shipments  in  carloads  when 
owned  by  different  shippers.  The  western  and  southern  roads 
do  not  specially  forbid  it.  All  such  differences  come  to  the  fore 
in  any  attempt  to  unify  the  practice  of  all  the  carriers  of  the 
country  under  a  single  set  of  regulations. 

Assuming  the  reasonableness  of  a  difference  in  charges  be- 
tween carload  and  small  shipments,  where  shall  the  dividing 
line  as  to  size  be  drawn?  This  is  the  important  and  perplex- 
ing problem  of  minimum  carload  rates.  Turning  to  our  excerpt 
from  the  Western  Classification  on  page  298,  it  appears  that 
24,000  pounds  of  advertising  matter,  N.  0.  S.  (not  otherwise 
specified),  must  be  shipped  at  one  time  in  order  to  warrant  a 
carload  rate.  Under  such  circumstances  a  consignment  of 
20,000  pounds  would  be  classified  first  instead  of  third  class  — 
the  difference  in  rate  varying  according  to  distance,  but  in  all 
cases  being  substantial.  Between  St.  Louis  and  St.  Joseph, 
Missouri,  for  example,  the  charge  would  be  sixty  instead  of 
thirty-five  cents  per  hundredweight.  Were  the  minimum 
weight  for  carloads  but  15,000  pounds,  as  in  the  case  of  harvest- 
ers under  the  Southern  Classification,  this  particular  shipment 
of  advertising  matter  would  have  enjoyed  the  full  benefit  of 


CLASSIFICATION  333 

wholesale  charges.^  From  this  instance  it  is  apparent  that  the 
point  at  which  the  minimum  carload  weight  falls,  is  of  great 
importance  in  the  determination  of  the  actual  rate  —  an  im- 
portance also  dependent,  of  course,  upon  the  spread  between 
carload  and  less-than-carload  charges.  It  is  also  evident  that 
minimum  carload  ratings  may  readily  be  used  as  a  means  of 
advancing  charges.  If,  as  appeared  in  a  recent  case,^  the  mini- 
mum carload  for  wool  in  sacks  was  advanced  between  1896  and 
1912  from  15,000  to  20,000  pounds,  the  effect  upon  the  shipper 
of  a  consignment  of  18,000  pounds,  for  example,  would  be  as 
truly  an  increase  of  charges  as  if  the  freight  rates  themselves 
had  been  actually  advanced.  For  under  the  new  schedule,  he 
would  be  compelled  to  pay  less-than-carload  charges  instead 
of  the  lower  carload  rates  formerly  granted.  Moreover,  it  is 
apparent  that  minimum  carload  weights  may  enter  seriously 
into  commercial  competition  in  a  number  of  ways.  If  45,000 
pounds  of  raw  cotton  by  a  special  round-bale  process  can  be 
loaded  upon  a  standard  car;  when  but  25,000  pounds  of  the 
ordinary  square  bales  could  be  carried  by  the  same  equipment; 
it  is  evident  that  tariffs  based  upon  the  higher  minimum  would 
especially  favor  one  set  of  competitors  as  against  another.^ 
They  might,  in  fact,  be  sufficient  to  turn  the  scale  entirely  in 

1  The  following  wide  variations  as  between  the  different  classifications 
appear  in  these  excerpts  alone,  varying  from  40,000  to  12,000  lbs,  in  the 
Southern  Classification,  for  instance. 

Official  Classification  — 

Scrap  zinc 36,000  lbs. 

Acetic  acid  in  carboys 24,000  lbs. 

Western  Classification  — 

Advertising  matter    24,000  lbs. 

Advertising  racks,  iron 30,000  lbs. 

Southern  Classification  — 

Zinc  concentrates 40,000  lbs. 

Fodder  shredders  12,000  lbs. 

Harvesters 15,000  lbs. 

Search  through  the  entire  list  would  doubtless  disclose  a  far  wider  range, 
with  coal  or  iron  at  90,000  lbs.  or  more,  and  feathers  at  the  foot  of  the  list. 

2  23  I.C.C.  Rep.,  158.  '  11  I.C.C.  Rep.,  328. 


334  RAILROADS 

favor  of  the  round-bale  system  throughout  the  South.  Granted, 
however,  that  such  heavy  loading  makes  for  economy  in  opera- 
tion, it  is  clear,  nevertheless,  that  the  carload  minima  must 
be  so  established  as  not  to  discriminate  against  the  great  bulk 
of  shipments  of  the  more  common  sort.  All  along  the  line  one 
meets  with  such  illustrations  of  the  bearing  of  the  minimum 
carload  upon  rivalry  in  business.  Large  shippers  are  con- 
tinually striving  for  a  high  minimum.  The  small  shippers 
oppose  it  for  the  same  reasons.  In  a  similar  way  the  interest 
of  the  manufacturer  distributing  his  goods  direct,  in  competition 
with  middlemen,  is  vitally  affected.^ 

Car  capacity,  both  as  regards  ability  to  load  and  carry 
economically,  is  the  principal  factor  in  the  determination  of 
minimum  carload  rates.  It  is  largely  a  question  of  relative 
cost  of  operation.^  Reference  has  already  been  made  to  the 
great  economy  incident  to  the  use  of  large  cars,  whereby  the 
paying  load  becomes  less  in  proportion  to  the  deadweight.  This, 
of  course,  largely  accounts  for  the  steady  increase  in  carload 
capacity  in  recent  years.  But  the  question  is  even  more  compli- 
cated. An  adjustment  must  be  made  between  two  main  groups 
of  freight:  first,  that  which  is  sufficiently  heavy  to  be  readily 
loaded  to  the  minimum  weight  in  ordinary  cars;  and,  secondly, 
light  and  bulky  goods  of  which  the  common  car  will  contain 
but  a  small  proportion  in  bulk  of  its  truck  capacity  by  weight. 
Fortunately,  we  may  evade  the  moot  point,  theoretically,  as  to 
whether  a  carrier  is  entitled  to  the  same  revenue  from  a  given 
vehicle,  whether  it  be  loaded  with  heavy  or  light  goods;  that  is 
to  say,  whether  the  rate  ought  properly  to  decrease  per  pound 
with  increase  in  the  density  of  the  lading.  This  is  a  technical 
matter  as  to  cost.  But  it  carries  certain  implications  of  con- 
siderable importance  commercially,  as  will  shortly  appear. 

1  Changes  in  minimum  carloads  since  1887  by  commodities  are  fully 
described  in  "Railways  in  the  United  States  in  1902,"  I.C.C,  1903,  Part 
II,  p.  17.     Their  relation  to  rate  increases  is  evident. 

"^  Strombeck,  Classification,  p.  35  et  seq.;  Railway  Age  Gazette,  June  30, 
1911,  p.  1696. 


CLASSIFICATION  335 

The  difficulty  of  conforming  carload  minima  upon  light  and 
bulky  articles  to  those  on  heavier  goods  has  appeared  with  each 
attempt  to  standardize  equipment.  Widely  divergent  rules  in 
the  three  main  classification  territories  still  cause  great  con- 
fusion in  this  regard.  There  is  a  constant  temptation  to  con- 
struct extra  long  or  wide  cars,  particularly  in  the  western  states, 
in  order  to  assist  the  manufacturers  of  such  light  and  bulky 
products  as  furniture  and  agricultural  machinery  in  their  com- 
petition with  dealers  in  the  East,  shipping  under  Official  Classi- 
fication requirements.  In  other  words,  the  penalty  carried 
under  the  rules  as  to  minimmn  carloads,  for  the  use  of  cars 
larger  than  the  standard,  has  been  much  less  in  the  West  than 
in  the  East  and  South.  The  situation  has  been  further  com- 
plicated in  some  instances  by  the  arbitrary  action  of  state  rail- 
way commissions.  The  experience  in  this  regard  is  illuminating, 
as  again  showing  the  extreme  delicacy  of  adjustment  in  such 
matters  under  the  stress  of  commercial  competition.  The 
short-line  distance  between  the  Missouri  and  Mississippi  rivers 
lies  entirely  within  the  state  of  IMissouri.  It  governs,  as  we 
have  already  seen,^  the  entire  rate  structure  in  this  part  of  the 
country.  This  commonwealth  some  years  ago  by  law  fixed  a 
carload  minimum  of  20,000  pounds  for  furniture,  agricultural 
implements  and  wagons.^  As  it  is  not  practicable  to  attain  this 
minimum  load  on  an  ordinary  standard  car,  the  Missouri  shipper 
was  stimulated  to  demand  larger  equipment  in  order  that  he 
might  avail  himself  of  the  lower  rate  for  carload  lots.  The 
local  railways,  accordingly,  built  such  cars,  which,  of  course, 
travelled  far  beyond  the  limits  of  this  single  commonwealth. 
This  forced  other  western  roads,  in  order  to  protect  their  clients 
in  the  same  markets,  to  adopt  a  similar  policy.  The  result  is 
that  extra  large  equipment  is  relatively  more  common  through- 
out this  territory;  thereby  conferring  a  distinct  advantage  over 

1  P.  128,  supra. 

-  Railway  Age  Gazette,  September  24,  1909,  p.  553,  Samuel  O.  Dumi, 
best  treats  this  topic. 


336  RAILROADS 

their  eastern  competitors  upon  western  shippers  of  such  light 
and  bulky  freight.  In  pursuance  of  this  same  protective  policy, 
the  western  roads  have  also  enforced  distinctly  favorable  rules 
as  to  carload  lots  applied  to  several  small  cars  instead  of  one 
large  one,^  These  troublesome  details  are  given  in  the  hope  that 
they  may  show  how  far  the  ramification  of  trade  competition 
extends.  They  re-enforce  the  conviction  that  any  reform  of 
classification  is  a  matter  of  extreme  difficulty;  and,  if  under- 
taken at  all,  must  be  done  under  governmental  compulsion  and 
by  a  single  universal  reform,  rather  than  by  any  attempt  at 
piecemeal  improvement. 

Next  to  ability  to  load  and  carry,  as  a  determinant  factor  in 
fixing  minimum  carload  weights,  the  consuming  capacity  of  the 
market  must  be  considered.  A  reasonable  minimum  carload  in 
the  East  might  well  be  unfair  in  the  West  or  South.  An  old- 
established  factory  in  New  England  might  satisfactorily  use  a 
quantity  of  raw  material  which  in  a  carload  lot  would  overwhelm 
a  western  or  southern  plant.  Thus  it  comes  about  that  mini- 
mum weights  on  the  same  goods  quite  properly  vary  widely  in 
different  territories;  being  higher  in  the  East  than  in  the  West, 
and  least  of  all  in  the  South.  The  problem,  therefore,  of 
standardizing  carload  rates  throughout  the  country,  unfortu- 
nately becomes  exceedingly  difficult.  A  compromise  will  fail 
to  satisfy  anybody;  and,  moreover,  such  a  change  of  minimum 
carload  weights  at  once  necessitates  a  remodelling  of  the  par- 
ticular distance  tariff  to  which  it  applies.  This  point  was  well 
illustrated  in  a  recent  case.^  A  railway  accepted  for  the  same 
carriage  at  different  times  two  carload  shipments  of  lime  from 
a  given  concern.  On  the  one,  a  rate  of  thirty-four  cents  per 
one  hundred  pounds  was  based  upon  a  minimum  carload  weight 
of  24,000  pounds.  On  the  other  twenty-nine  cents  was  assessed 
upon  a  minimum  of  30,000  pounds.  The  carrier  alleged  that 
these  differences  in  rates  per  pound  were  entirely  compatible  in 

'  CJ.  the  "two-for-one"  rule  in  the  Indianapolis  case;  16  I.C.C.  Rep., 
254.  2  23  I.C.C.  Rep.,  259;  also  23  Idem,  226. 


CLASSIFICATION  337 

view  of  the  difference  in  carload  minima.  It  then  appeared 
that  these  minima,  especially  with  a  perishable  commodity 
like  lime,  varied  considerably  according  to  destination.  Large 
distributing  centres  were  given  low  rates  on  high  minima,  while 
small  towns,  consuming  relatively  less,  were  best  served  by  a 
lower  carload  minimum  to  which  a  higher  rate  per  pound  was 
applied.  In  other  words,  the  close  interrelation  between  the 
rate  and  the  minimum  was  a  matter  of  great  commercial 
importance. 

The  relation  of  carloads  to  consuming  capacity  of  the 
market  is  an  element  in  the  trade  policy  of  protection  to  clients 
extended  by  the  railway.  The  difficulty  of  properly  relating 
rates  upon  raw  and  finished  products  has  already  been  discussed. 
Carload  minima  must  also  be  considered  in  this  connection. 
Why  should  50,000  pounds  be  prescribed  as  the  carload  limit 
on  corn  to  Texas  points,  when  the  limit  on  corn-meal  is  only 
30,000  pounds?  Evidently  differences  in  loading  capacity  are 
inadequate  as  an  explanation.  Nor  can  this  be  accounted  for 
on  the  ground  of  any  difference  in  mere  cost  of  carriage.  The 
explanation  is  purely  commercial  —  springing  from  the  com- 
petition between  northern  mills  and  mills  located  in  Texas, 
both  making  use  of  raw  material  from  the  same  fields.  A  heavy 
carload  minimum  is  entirely  practicable  on  corn  for  the  Texas 
miller;  but  an  equally  heavy  carload  requirement  on  corn-meal 
would  shut  out  the  northern  miller  entirely  from  many  local 
points.  For  the  market  at  these  small  places  is,  of  course, 
relatively  restricted.^  There  can  be  no  doubt  that  every 
feature  of  classification,  even  down  to  the  last  minute  details 
of  carload  minima,  stands  in  such  intimate  relation  to  commer- 
cial competition,  that  to  disturb  it  in  one  regard  may  entail 
the  most  far-reaching  consequences. 

Ever  since  1888  the  constantly  increasing  elaboration  of  the 

three  main  classifications  in  force,  with  all  the  resulting  incon- 

1  11  I.C.C,  223.     Cf.  also  p.  395,  infra. 
VOL.  1—22 


338  RAILROADS 

sistencies  and  overlappings,  has  led  to  a  persistent  demand  for 
the  introduction  of  a  single  uniform  classification  for  the  entire 
country.  Soon  after  the  passage  of  the  original  Act  to  Regu- 
late Commerce  in  1887,  a  resolution  passed  the  House  of  Rep- 
resentatives directing  the  prescription  of  such  a  classification. 
Apparently  the  Interstate  Commerce  Commission  was  fully 
alive  to  the  difficulties  of  such  an  undertaking.  The  railways 
were  induced  to  move  in  the  matter,  but  to  no  purpose.^  This 
first  abortive  attempt  reflected  the  mutual  jealousies  of  com- 
peting roads,  as  well  as  the  difficulties  of  suiting  a  single  classi- 
fication to  the  variety  of  local  conditions  existing  throughout 
the  country.  All  that  was  done  was  the  recommendation  of 
a  "Board  of  Uniform  Freight  Classification,"  comprising  two 
members  from  each  of  the  important  territorial  bodies  and  in- 
cluding both  the  Mexican  and  Canadian  carriers.  Changes 
were  to  be  made  by  a  two-thirds  vote.  Jurisdiction  over  the 
tripartite  division  of  territory,  east,  south  and  west,  was  to  be 
assigned  to  district  chairmen.  Final  authority  for  the  country 
at  large  was  to  be  vested  solely  in  the  whole  board.  The  abso- 
lute refusal  of  the  New  York  Central  &  Hudson  River  to  accede 
to  this  plan  prevented  its  acceptance.  Apj^arently  too  many 
special  or  commodity  rates  were  in  force  upon  its  line,  in  order 
to  hold  its  powerful  clients  in  markets  all  over  the  country,  to 
make  it  practicable  to  adopt  the  scheme.  Efforts  toward  uni- 
formity were  renewed  in  1890,  confined  this  time,  however,  to  an 
attempt  to  merge  the  Official  and  Western  Classifications.  But 
the  same  jealous  regard  of  local  interests  in  each  territory, 
especially  with  reference  to  the  treatment  of  carload  ratings, 
once  more  proved  an  insuperable  obstacle.  The  trunk  lines 
insisted  upon  such  specially  low  charges  on  small  shipments  as 
would  enable  manufacturers  and  jobbers  in  the  East  to  hold 
their  markets  in  remote  districts  in  competition  with  rivals 
in  the  Middle  West.    The  issue  raised  in  the  New  York  Board 

1  Nothing  was  accomplished,  beyond  the  preparation  of  a  compre- 
hensive report,  under  the  chairmanship  of  J.  W.  Midgley  in  June,  1890. 


CLASSIFICATION  339 

of  Trade  case,  previously  discussed,  led  to  the  defeat  of  this 
plan. 

A  notable  revival  of  interest  in  uniform  classification 
under  governmental  authority  has  taken  place  since  the 
enactment  of  the  Mann-Elkins  amendments  to  the  Inter- 
state Commerce  Law  in  1910.  An  independent  bill  in  Con- 
gress to  authorize  the  enforcement  of  such  a  schedule  failed. 
The  railways  were  stimulated,  however,  to  make  a  further 
attempt  to  solve  the  difficulty.^  Protracted  sessions  during 
1907-1908  by  a  conference  of  five  representatives  from 
different  parts  of  the  country,  known  as  the  Uniform  Clas- 
sification Committee,  led  to  many  concessions  and  com- 
promises in  favor  of  harmony.  The  committee  expressed 
its  belief  that  a  uniform  classification  could  be  drawn  up  in 
time;  but  it  emphasized  the  important  point  that  all 
changes  in  classification  must  be  accompanied  by  such  ad- 
vances or  reductions  in  the  distance  tariffs  as  to  insure  the 
prevailing  commercial  adjustments. 

The  latest  advertisement  of  the  difficulties  of  uniform  classi- 
fication took  place  in  connection  with  the  attempted  intro- 
duction in  1912  of  various  amendments  and  reforms  proposed 
by  this  Uniform  Classification  Committee. ^  Acting  in  con- 
junction with  the  National  Association  of  Railway  Commis- 
sioners, an  earnest  attempt  seems  to  have  been  made  to  eliminate 
differences  between  the  three  great  schedules.  Few  articles 
were  actually  shifted  from  one  class  to  another,  the  effort  being 
concentrated  upon  the  establishment  of  more  uniform  rules  and 
descriptions.  It  was  alleged  by  shippers  that  more  often  than 
otherwise,  these  changes  had  brought  about  an  advance  rather 
than  a  reduction  of  charges.  It  is  difficult  to  decide  as  to  this. 
But  it  is  clear  that  progress  in  the  direction  of  uniformity  is 


1  Railway  Age  Gazette,  May  10,  1907,  p.  727;  1909,  p.  415.  The  whole 
movement  is  reflected  in  the  Proceedings  of  the  National  Convention  of 
State  Railroad  Commissioners  year  by  year. 

2  Railway  Age  Gazette,  1912,  pp.  211,  224,  252  and  370. 


340  RAILROADS 

taking  place.  For  example,  the  minimum  carload  weight  for 
paper,  once  varying  greatly  in  different  parts  of  the  country, 
was  fixed  at  an  intermediate  figure  which  fairly  satisfied  con- 
flicting interests.  Many  opportunities  for  personal  discrimi- 
nation were  also  eradicated.  Grading  according  to  value,  for 
instance,  has  in  the  past  been  a  prolific  source  of  abuse.  Candy 
at  less  than  fifteen  cents  a  pound  rated  third  class,  but  if  of 
higher  value  moving  on  first-class  rates,  offered  an  incentive 
to  false  declaration  on  the  part  of  unscrupulous  shippers  which 
was  very  properly  eliminated.  Abohtion  of  the  distinction 
between  finished  stationery  and  flat  paper,  put  an  end  to  possi- 
ble under-classification  in  the  same  way.  Naturally  the  carriers 
in  abolishing  such  fine  distinctions,  grade  upward  rather  than 
downward.  Much  objection  was  also  made  at  this  time  to 
beneficial  modification  of  the  rules  for  mixed  carload  shipments. 
Binder  twine  had  for  years  been  classified  with  ploughs  and 
harvesters  rather  than  with  ropes  and  cordage.  Half  a  carload 
of  agricultural  machinery,  therefore,  with  half  a  carload  of 
twine,  formerly  moving  under  carload  rates,  was  no  longer,  as 
proposed,  to  be  allowed  the  privilege  of  mixing.  Similarly, 
abolition  of  the  right  to  bunch  wood-working  and  iron-working 
machinery  naturally  aroused  protest.  Such  details  are  here 
offered,  not  because  of  their  intrinsic  importance,  but  as  illus- 
trating the  opposition  on  behalf  of  shippers  to  any  movement 
toward  uniformity,  even  in  these  minor  details.  What  the 
force  of  this  opposition  would  become,  were  propositions  ad- 
vanced for  shifting  thousands  of  articles  bodily  from  one  class 
to  another,  may  be  readily  imagined.  The  experience  thus  far 
obtained,  emphasizes  the  point  that  any  considerable  improve- 
ment must  be  carried  through,  if  at  all,  by  direct  pressure  from 
governmental  authority,  not  upon  the  carriers  alone  but  upon 
the  shippers  as  well. 

The  degree  of  complexity  at  the  present  day  incident  to 
overlapping  and  conflicting  jurisdiction  of  the  several  state  and 
railway  classification  committees  and  associations,  may  be  best 


CLASSIFICATION  341 

described  by  means  of  a  few  examples.  ^  Traffic  originating  in 
Southeastern  Freight  Association  territory,  except  Florida, 
destined  to  cities  in  trunk  line  territory  is  governed  by  the 
Southern  Classification  all  the  way  if  moving  on  through  rates; 
if  on  local  rates,  the  Official  Classification  applies  north  of  the 
Ohio  river.  From  "Green  Line  territory"  -  to  Pacific  coast 
terminals,  the  Southern  Classification  governs  to  the  Mississippi 
or  other  gateways;  the  Western  Classification  beyond.  But  if 
it  originate  in  Louisiana  or  Mississippi,  the  Western  Classifi- 
cation governs  all  the  way.  From  most  places  in  Tennessee, 
Western  Classification  rules  govern  all  the  way,  "subject  to 
commodity  rates  or  less-than-carload  consignments,  classified 
not  lower  than  fourth  class."  To  Wisconsin  from  points 
throughout  the  South,  the  Southern  Classification  governs  all 
the  way.  But  to  Minnesota,  generally.  Southern  rules  govern 
to  the  Ohio  river  crossing,  while  Western  rules  apply  to  the 
balance  of  the  trip;  unless  the  goods  move  through  trunk  line 
territory  by  way  of  the  Virginia  gateways,  in  which  case  the 
Official  Classification  is  effective.  These  are  only  a  few  samples 
chosen  from  a  large  collection.  Is  it  any  wonder  that  to  the 
uninitiated,  rate  making  under  such  conditions  appears  to  be 
almost  a  superhuman  task;  and  is  it  surprising  that  to  the 
unscrupulous,  such  complicated  conditions  give  rise  to  more  or 
less  successful  attempts  at  evasion  of  published  rates? 

The  present  threefold  territorial  division  of  the  country, 
for  the  purposes  of  classification,  naturally  affords  all  sorts  of 
possibilities  in  the  way  of  veiled  discrimination,  not  merely  as 
between  persons  but  as  affecting  the  interests  of  different  com- 
peting markets.  Not  only  is  there  liability  to  confusion,  but 
the  way  is  paved  for  all  sorts  of  favoritism.  Wherever  ship- 
ment is  made  from  one  classification  territory  to  another,  it  is 
always  possible  to  adjust  the  rates  with  a  view  to  local  advantage. 
For  instance,  one  of  the  principal  causes  of  complaint  in  the 

1  Lectures  by  O.  M.  Rogers,  La  Salle  Extension  University,  Chicago, 
1910.     Also  Railway  Traffic  Maps  by  W.  A.  Shelton,  Chicago,  1913. 

2  P.  12,  supra. 


342  RAILROADS 

South  is  the  advantage  which  Nashville,  Tennessee,  enjoys 
through  having  all  of  its  rates  from  eastern  and  northern  centres 
made  upon  the  Official  Classification.  Inasmuch  as  the  rates 
under  the  Southern  Classification  are  considerably  higher,  this 
operates  to  place  other  competing  cities  in  the  South  under  a 
distinct  disability  in  competition  with  Nashville.  It  is  possible, 
therefore,  for  the  Louisville  &  Nashville  by  this  means  to  build 
up  one  community  at  the  expense  of  another.  The  same 
device  gives  Richmond,  Norfolk  and  the  other  Virginian  cities 
a  great  advantage  over  their  competitors.^  Again,  rates  from 
New  York  to  Memphis  and  New  Orleans  are  made  upon  the 
Official  Classification,  by  whatever  route;  while  to  intermed- 
iate points,  such  as  Vicksburg,  Natchez,  and  Baton  Rouge, 
they  go  on  the  rates  prescribed  by  the  Southern  Classification, 
which  are  considerably  higher.  From  New  York  to  St.  Paul 
through  Chicago,  shipments  are  made  on  the  low  rate  basis  of 
the  Official  Classification;  while  from  Chicago  to  St,  Paul 
they  go  under  the  Western  Classification.  From  Birmingham, 
Alabama,  to  St.  Paul,the  rates  as  far  as  Chicago  are  based  upon 
the  Southern  schedule,  and  from  thence  on  under  the  Western. 
From  San  Francisco  to  St.  Paul,  the  Western  Classification 
prevails,  unless  the  freight  is  carried  under  the  commodity 
rates  of  the  Transcontinental  schedule.  The  peculiar  situation 
of  Nashville  on  shipments  from  the  Northeast  has  already  been 
stated.  This  immediately  complicates  the  rates  from  so-called 
Cook  County  Junctions  —  that  is  to  say,  from  Chicago  terri- 
tory. All  consignments  for  the  entire  distance  are  governed 
by  the  Southern  Classification.  This,  in  face  of  the  low  Official 
Classification  rates  from  trunk  line  territory,  operates  as  a 
discrimination  against  Chicago.  Even  more  complicated  still 
are  the  combinations  by  which  rates  are  made  from  local  points 
in  the  North  into  the  Far  Southwest.  And  still  farther  com- 
plexity results  from  the  existence,  as  already  mentioned,  in 

1  Well  brought  out  in  the  Danville  case,  8  I.C.C.  Rep.,  409  and  571; 
and  in  the  complaint  of  Wilmington,  9  Idem,  48. 


CLASSIFICATION  343 

several  parts  of  the  country,  such  as  Iowa,  Illinois,  Georgia, 
etc.,  of  state  classifications,  prescribed  by  the  railway  com- 
missions. These,  to  be  sure,  are  intended  for  application  only 
to  local  rates.  But  by  this  means,  the  jobbing  interests  of  the 
localities  are  protected,  without  at  the  same  time  giving  con- 
sideration to  an  equitable  adjustment  as  between  all  the 
remoter  interests  concerned.^  One  of  the  primary  advantages, 
therefore,  from  the  unification  of  the  three  systems  now  existing, 
would  be  the  possibility  of  readjusting  not  only  definitely, 
but  also  equitably,  the  conflicting  interests  of  various  shippers 
and  communities  now  tied  up  by  these  local  arrangements. 

A  recent  case-  illustrates  the  bearing  of  classification  rules 
upon  competition  in  trade  as  between  rival  cities.  Chicago  and 
most  of  the  Ohio  river  gatewaj^s  enjoy  a  so-called  "two-for-one- 
rule,"  permitting  the  application  of  carload  rates  on  part  car- 
loads in  excess  of  full  car  ladings.  The  complaint  alleged  that 
the  denial  of  this  privilege  to  Indianapolis,  whereby  less-than- 
carload  rates  were  charged  on  excess  fractional  carloads,  un- 
justly discriminated  against  this  city  in  the  transportation  of 
various  light  and  bulky  articles,  such  as  vehicles  and  furniture, 
in  competition  for  trade  throughout  the  Southwest.  The 
difficulty  arose  from  a  conflict  between  rules  in  the  Western 
Classification  and  the  Southwestern  Tariff  Committee,  the 
latter  being  a  subordinate  body  having  jurisdiction  over  local 
practices  in  Texas  and  the  neighborhood.  The  rule  in  one  case 
provided  that  where  a  car  of  sufficient  capacity  to  accommodate 
light  and  bulky  shipments  could  not  be  promptly  furnished, 
two  smaller  cars  would  be  provided,  subject  to  wholesale  rates, 
however  the  consignment  was  divided  between  the  two  cars. 
The  Commission  declined  to  interfere  in  this  case,  anticipating 
the  necessity  for  a  thoroughgoing  revision  of  all  such  rules 


1  Notable  recent  instances  are  afforded  in  the  State  Rate  cases  now 
pending  before  the  U.  S.  Supreme  Court,  and  in  the  Shreveport  case, 
23  I.C.C.  Rep.,  31;  both  discussed  in  chapter  XX. 

'  16  I.C.C.  Rep.,  254. 


344  RAILROADS 

which,  it  is  obvious,  almost  invite  manipulation  of  rates  and 
improper  discrimination. 

Even  a  cursory  examination  of  the  classification  a  few  years 
ago  would  bring  to  light  all  sorts  of  petty  anomalies  and  inex- 
plicable conflicts  both  of  description  and  rates.  Most  of  these 
doubtless  had  some  warrant  originally,  but  it  seems,  indeed,  as 
if  many  differences  might  be  eliminated.^  For  instance, 
"excelsior  spring  beds  K.  D.  (knocked  down),  sawdust,  and 
leather  belting,  are  all  in  the  second  class  of  the  Official  Classi- 
fication, when  shipped  in  less-than-carload  lots.  In  the 
Western,  only  the  belting  and  beds  are  in  the  second  class, 
excelsior  is  third  and  sawdust  fourth;  while  in  the  Southern, 
beds  are  first  class,  belting  second  class,  excelsior  fifth  class, 
and  sawdust  sixth."  The  recent  complaint  of  the  Greater  Des 
Moines  Committee  ^  disclosed  an  odd  state  of  affairs  under  which 
old  shoes  were  given  a  carload  rating  to  Des  Moines  —  an 
advantage  not  extended  to  new  and  unused  footwear.  Why 
should  axes  be  given  carload  rating  in  trunk  line  territory 
when  the  freight  rate  on  hatchets  is  the  same  whether  the  ship- 
ments are  in  100  pound  or  20,000  pound  lots?  Is  it 
logical  that  cotton  piece  goods  from  Atlanta  to  Boston  should 
be  differently  classified  from  the  same  commodity  exchanged 
between  the  same  two  cities  in  the  opposite  direction;  or  that 
goods  should  enter  Richmond,  Virginia,  on  one  classification 
and  go  out  on  another?  Such  anomalies  are  sometimes  difficult 
to  account  for.  Their  existence,  however,  despite  the  efforts 
of  the  carriers  to  eliminate  them  and  to  keep  them  eliminated, 
emphasizes  strongly  the  need  for  such  continual  revision  as 
shall  more  generally  standardize  practice.  Few  carriers  alone 
are  able  to  withstand  pressure  from  powerful  shippers.  It  is 
difficult,  in  fact,  even  for  the  classification  committees  to  oppose 
them.     The  strong  hand  of  the  government  should  enforce 

'  Some  are  described  in  the  Reports  of  the  U.  S.  Industrial  Commis- 
sion, 1900;   and  the  Senate  (Elkins)  Committee,  1905. 
*  14  I.  C.C.  Rep.,  294. 


CLASSIFICATION  345 

harmonious  action  to  the  fullest  degree  compatible  with  the 
growth  of  trade  and  conflicting  commercial  mterests.  It 
would  help  the  railways  even  more  than  the  shippers. 

And  yet,  bearing  in  mind  all  the  disadvantages  and  evils 
of  the  present  threefold  system,  the  obstacles  incident  to  the 
substitution  of  a  single  uniform  classification  for  the  United 
States  grow  more  impressive  as  one  examines  them  in  detail. 
Our  vast  territory  and  the  extreme  diversity  of  agricultural  and 
industrial  conditions  render  the  problem  far  more  difficult  than 
in  the  compact  and  more  homogeneous  communities  abroad. 
The  primary  advantage  of  the  present  system  is  that  each  of 
the  three  existing  classifications  more  or  less  clearly  reflects 
local  trade  conditions  in  its  own  territory.  From  the  point 
of  view  of  transportation,  the  same  commodity  may  well  be 
able  to  yield  widely  different  proportions  of  the  total  revenue 
levied  upon  the  traffic  of  that  section.  For  example,  cotton 
piece  goods  may  be  rated  first  class  in  Western  territory,  fourth 
class  in  Southern,  second  class  less  fifteen  per  cent,  in  Official 
territory,  and  one-third  of  first  class  in  the  transcontinental 
tariffs.  The  reason  for  this  diversity  of  treatment  is  that  such 
cotton  piece  goods  both  in  the  South  and  the  East  are  a  staple 
product  of  the  district.  The  rates,  therefore,  in  each  case  are 
intended  to  foster  the  manufacture  of  cotton  by  according  a 
relatively  low  freight  rate  upon  its  output.  In  the  West,  on 
the  other  hand,  where  no  cotton  is  raised  and  no  cotton  mills 
exist,  these  goods  become  much  more  valuable,  as  classified, 
relative  to  other  commodities.  Oranges  or  lemons  in  southern 
California  are  favored  by  almost  commodity  rates  in  order  to 
foster  the  industry  in  that  locality.  But  these  citrus  fruits 
reaching  New  England  as  a  luxury,  may  consequently  there  be 
made  to  contribute  a  much  larger  proportion  of  the  railways' 
revenue.  The  East,  as  a  rule,  classifies  manufactured  products 
relatively  low,  inasmuch  as  it  is  the  home  territory  for  industry 
of  this  sort.  But  these  products,  when  they  pass  beyond  the 
Mississippi,  rise  almost  automatically  to  a  higher  class  as  they 


346  RAILROADS 

increase  in  value  to  the  community  in  which  they  are  consumed. 
How  different  are  the  commercial  conditions  under  which  wool 
is  rated  east  and  west!  In  one  territory  it  is  distributed  to 
manufacturers  in  small  lots  at  way  stations;  in  the  other  it 
moves  long  distances  in  solid  carload  lots. 

One  further  illustration  may  make  our  point  clear.  At  first 
sight  it  is  anomalous  that  in  the  East  the  rates  on  cattle  and 
shoes  between  New  York  and  Boston  are  not  widely  different, 
namely  nineteen  cents  and  twenty-five  cents,  respectively,  per 
one  hundred  pounds;  while  as  between  Montana  and  Chicago, 
the  rate  on  shoes  west  bound  is  almost  four  times  as  great,  as 
the  rate  on  cattle  over  the  same  haul  eastward.  In  other  words, 
rates  on  shoes  in  the  East  are  at  bedrock,  whereas  in  the  West 
it  is  the  cattle  rates  which  are  held  at  the  lowest  possible  point. 
Ton-mile  rates  on  shoes,  in  other  words,  increase  progressively 
toward  the  west,  while  ton-mile  rates  on  cattle  rise,  contrariwise, 
in  the  direction  of  the  stronghold  of  manufactures.  The  differ- 
ence between  the  two,  however,  is  in  the  fact  that  the  upper 
level  of  what  the  traffic  will  bear  is  very  much  greater  in  the 
case  of  one  than  of  the  other.  Cattle,  possibly,  may  never 
support  more  than  seventy-five  cents  per  hundredweight; 
while  shoes  can  be  moved  under  rates  four  times  as  high. 

Obviously  any  mere  comj^romise  between  divergent  classi- 
fications, each  based  upon  the  protection  of  a  local  constituency 
against  competition  from  outside  its  own  territory,  can  hardly 
prove  satisfactory.  Cotton  piece  goods,  already  instanced  in 
this  regard,  if  grouped  as  first  class  in  the  West,  second  class 
less  fifteen  per  cent,  in  the  East,  and  fourth  class  in  the  South, 
would  hardly  be  adequately  treated  in  a  uniform  classification 
for  the  entire  country  by  averaging  these  different  figures. 
For  neither  the  West  nor  the  South  would  be  satisfied  —  the 
rating  being  too  high  to  fully  protect  the  southern  mills  against 
competitors  in  New  England;  nor,  on  the  other  hand,  would  the 
classification  be  sufficiently  high  in  the  West  to  yield  the  roads 
proportionately  the  revenue  which  goods  of  that  character 


CLASSIFICATION  347 

ought  properly  to  contribute.  The  East,  alone,  lying  inter- 
mediate between  the  other  two,  would  not  be  greatly  disturbed. 
The  necessary  outcome,  it  is  predicted,  of  the  adoption  of  any 
such  average  or  uniform  classification  would  be  the  quotation 
of  exceptional  commodity  rates  wherever  the  uniform  classi- 
fication was  at  variance  with  local  interests.  The  increase  in 
commodity  ratings  after  1887  —  now  happily  reversed  —  may 
perhaps  be  in  part  accounted  for  in  this  way.  Any  such  stimu- 
lation of  exceptional  ratings  would  be  a  primary  objection  to 
any  uniform  classification  for  the  United  States  as  a  whole. 
As  one  \\dtness  before  the  Interstate  Commerce  Commission 
testified,  "If  ever  there  is  a  uniform  classification,  it  will  take 
a  warehouse  to  hold  the  commodity  tariffs."  Were  such  the 
case,  far  greater  complexity  and  possible  discrimination  might 
exist  than  at  the  present  time. 

A  second  equally  important  disadvantage  of  the  pre- 
scription of  a  uniform  classification  arises  from  the  fact,  already 
noted,  that  classifications  and  distance  tariffs  are  interlocking 
and  interdependent.  Any  change  of  the  one  involves  a  change 
of  the  other.  Therefore,  a  unification  of  the  three  existmg  clas- 
sifications would  render  it  necessary  to  overhaul  from  top  to 
bottom  the  distance  tariffs  under  which  it  was  to  be  applied  all 
over  the  country.  For  example,  the  rate  from  New  York  to 
Atlanta,  first  class,  being  $1.14,  while  the  rate  from  New  York 
to  Chicago,  about  the  same  distance,  first  class,  was  75  cents;  to 
choose  a  first-class  rating  which  should  apply  on  both  these  lines 
would  mvolve,  not  only  a  re-classification  of  the  commodities, 
but  also  that  the  new  rates  applying  upon  first-class  goods 
should  be  somewhere  between  SI.  14  and  75  cents.  Inasmuch 
as  it  had  taken  manj^  years  to  reach  the  present  adjustment, 
it  seems  hardly  possible  that  a  new  arrangement  could  be  made 
which  would  yield  the  railways  a  satisfactory  return  upon  their 
traffic.  The  difficulty  herein  suggested  was  clearly  instanced 
in  the  case  of  a  comparison  made  between  the  Southern  Classi- 
fication and  the  Uniform  Classification  proposed  in  1890.    The 


348  RAILROADS 

difficulty,  and  always  a  prominent  one,  was  that  the  Uniform 
Classification  was  largely  for  carload  lots,  while  the  practice 
was  entirely  different  in  the  old  Southern  Classification.  More- 
over, most  of  the  Southern  rates  were  given  for  goods  "released  " ; 
that  is  to  say,  at  the  owner's  risk.  Cotton  piece  goods,  non- 
released,  in  less-than-carload  lots  from  New  York  to  Atlanta, 
were  charged  sixty  cents  a  hundredweight  under  the  old 
Southern  Classification.  As  reclassified  in  the  suggested 
Uniform  Classification,  the  rate  was  ninety-eight  cents;  and 
was  given  only  for  "released,"  that  is  to  say,  at  owner's  risk. 
The  difference  for  the  same  commodity  from  Louisville  to 
Atlanta  was  as  fifty-six  cents  in  the  old  Southern,  to  ninety- 
two  cents  under  the  IJniform.  Canned  goods,  not  otherwise 
specified,  "non-released,"  in  less-than-carload  lots  from  Louis- 
ville to  Atlanta,  were  charged  sixty-eight  cents  under  the  old 
Southern  Classification.  The  new  Uniform  Classification,  in 
order  to  yield  the  same  revenue,  made  it  necessary  to  charge  a 
rate  of  eighty-one  cents.  Differences  of  this  kind  were  manifest 
in  every  one  of  the  thousands  of  commodities.  In  other  words, 
the  adoption  of  a  uniform  classification  meant  to  abolish  by  a 
stroke  of  the  pen  all  the  old  rates  which  formerly  existed.  An 
entirely  new  schedule  of  rates  would  have  had  to  be  worked 
out;  with  the  most  uncertain  results  upon  revenue  and  upon 
the  rival  commercial  interests  concerned.  The  magnitude  of 
such  a  task  can  be  scarcely  appreciated.  Years  would  be 
required  to  reach  a  condition  of  relative  stability  once  more. 

The  close  interdependence  of  classification  and  distance 
tariffs,  as  well  as,  incidentally,  the  differing  spread  of  rates 
between  various  groups  of  goods  under  the  three  existing  classi- 
fication systems,  are  so  fundamental  in  their  bearing  on  reform 
that  yet  another  illusLration  may  not  be  out  of  place.  It  is 
given  in  the  following  table.  This  shows  the  rates  from  St. 
Louis — standing  at  the  meeting  point  of  the  main  classification 
territories  —  for  approximately  equal  distances  out  in  three 
different  directions. 


CLASSIFICATION  349 

Rates  Cents  per  100  Iba. 

Southern  Classification  — 

St.  Louis  to  Nashville  .  .  . 
(323  miles) 


1 

2 

3 

4 

5 

6 

A     B 

61 

52 

45 

35 

28 

23 

22    26 

1 

2 

3 

4 

5 

6 

Official  Classification  — 

St.  Louis  to  Louisville  .  . . 

(317  miles)  41     34j  25i  17i  15     12 

Western  Classification  — 
St.     Louis    to    St. 

Joseph    1       23       4       5       ABODE 

(320  miles)    60  45  35  27  22  24j  19j  17  13^  11 

Illinois  Classification  — 

St.  Louis  to  Chicago    1234        5        67        89     10 
(284  miles)  43.3  35.2  27.5    22    17.6  16.6  15.1  13.5  10.7  9.6 

One  line  penetrates  Southern  territory  323  miles  to  Nashville; 
another  goes  eastward  317  miles  to  Louisville  under  Official 
ratings ;  and  the  third  extends  westward  320  miles  to  St.  Joseph, 
according  to  the  schedules  of  the  Western  Classification.  To 
these  three  there  is  also  added  a  set  of  rates  north  bound  under 
the  Illinois  Classification  which  applies  between  St.  Louis  and 
Chicago,  284  miles.  This  last  schedule,  of  course,  is  prescribed 
by  the  state  railway  commission.  The  first  point  to  notice  is 
the  widely  different  number  of  groups  in  the  four  schedules. 
One  is  divided  into  eight  classes;  another  into  six;  while  the  last 
two  are  each  spread  over  ten  subdivisions.  Secondly,  bearing 
in  mind  that  the  three  upper  schedules  govern  approximately 
the  same  mileage,  it  will  be  noted  that  the  Official  rate,  first 
class,  is  only  about  two-thirds  of  that  in  the  other  two  classes. 
If  one  then  compares  the  sixth  group  in  each  case,  an  even 
greater  divergence  appears  —  the  Official  rate  being  only 
about  one-half  of  that  in  the  other  two  cases.  Or,  taking  the 
lowest  rates  of  all  in  the  three  upper  schemes  —  always,  be  it 
noted,  for  equal  mileages  —  it  now  appears  that  the  Official 
and  the  Western  descend  to  about  the  same  figure,  while  the 
Southern  is  arrested  at  a  point  more  than  twice  as  high.  The 
primary  significance  of  this  showing  is,  of  course,  that  a  single 


350  RAILROADS 

uniform  classification  in  which  all  of  these  three  systems  should 
be  merged,  means  not  merely  a  re-assignment  of  all  possible 
commodities  in  a  given  number  of  classes;  but  also  a  complete 
recasting  of  the  distance  tariffs  as  well.  In  other  words,  as 
aforesaid,  freight  rates  being  compounded  of  the  two  factors, 
distance  charge  and  classification,  all  the  delicate  adjustments 
based  upon  commercial  competition  throughout  the  country, 
would  be  thrown  into  utter  confusion;  unless  every  modifica- 
tion of  the  grouping  of  classes  were  accompanied  by  a  corre- 
sponding change  in  the  rates  per  mile.  A  task  sufficient 
indeed  to  appall  the  best  of  traffic  experts ! 

To  complete  the  demonstration  of  the  complexity  of  present 
arrangements,  and  yet  of  the  danger  incident  to  rudely  dis- 
turbing them,  one  should  apply  the  classified  rates  in  the 
preceding  paragraph  for  these  equal  hauls  to  particular  com- 
modities.     Take  household  goods  in  carloads,  for  example :  — 

Cents  Per  Cent,  of 

per  100  lbs.        first-class  rate. 

St.  Louis  to  Nashville 23  38 

St.  Louis  to  Louisville 34.5  83 

St.  Louis  to  St.  Joseph 19.5  33 

St.  Louis  to  Chicago 15.1  35 

Examination  of  the  classification  volumes  thus  assigns  these  the 
following  rates  in  the  three  directions  for  equal  distances  out  of 
St.  Louis.  Going  east  the  charge  would  be  34.5  cents,  going 
west  19.5  cents,  and  going  south  23  cents  per  100  pounds, 
respectively.  The  hodgepodge  is  made  more  manifest-  by  the 
right  hand  column  in  this  table,  in  which  the  percentage  of 
first-class  rates  levied  upon  household  goods  in  carloads  under 
the  four  classifications  is  shown.  Under  the  Official  system, 
with  the  lowest  first-class  rates,  as  above  noted,  the  rate  on 
household  goods  is  higher  than  under  any  of  the  other  three. 
The  result  is  that  the  relation  between  the  rate  on  household 
goods  and  first-class  goods  is  eighty-three  per  cent.;  whereas 
in  the  other  two  cases  it  is  substantially  less  than  half  this 
percentage.     This  single  illustration,  it  is  hoped,  may  drive 


CLASSIFICATION  351 

home  the  conclusion  that  there  is  an  immense  mass  of  fortuitous 
and  utterly  unreasonable  allocation  under  the  classification 
systems  as  they  are  at  present  estabhshed.^  But  whether  that 
may  be  used  as  an  argument  in  favor  of  substituting  a  single 
uniform  classification  is  open  to  serious  doubt.  Rather  does 
it  serve  to  emphasize  the  fact  that  rigid  revision  of  the  present 
scheme  under  Federal  control,  perhaps,  is  more  necessary  than 
an  experiment  in  uprooting  the  entire  system. 

A  few  general  conclusions  may  be  drawn  from  this  rather 
over-elaborate  description  of  present  conditions  as  to  classifica- 
tion in  the  United  States.  It  has  been  necessary,  however,  to 
reiterate  details  in  order  to  make  clear  the  extremelj^  unsatisfac- 
tory situation  at  the  present  time.  In  fact,  in  this  domain  of 
classification,  standardization  of  practice  so  characteristic  of 
American  rate  making  and  operation  in  general,  has  noticeably 
lagged  behind.  Whether  it  will  be  possible,  in  \'iew  of  the  wide 
extent  of  the  country  and  the  diversity  of  its  climatic  and  com- 
mercial conditions,  ever  to  devise  a  single  uniform  classification 
is  open  to  serious  doubt.  Even  the  Interstate  Commerce  Com- 
mission, once  a  leader  in  the  demand  for  uniformit}'',  now  con- 
cedes this  fact  in  particular  instances. ^  Thus:  —  "wool  east  of 
the  Mississippi  is  taken  up  at  numerous  points  and  is  carried 

1  "In  the  Southern  Classification  plate  glass,  all  sizes,  in  carloads,  is 
rated  third  class;  window  glass  and  rough  or  ribbed  glass,  fifth  class.  In 
the  Western  Classification  plate  glass,  outside  measurement  not  exceeding 
100  united  inches  (that  is,  length  and  width  added),  is  rated  fourth  class 
in  carloads;  window  glass,  and  rough,  rolled,  or  ribbed  glass,  fifth  class. 
In  the  Official  Classification  plate  glass,  outside  measurement  not  exceeding 
80  united  inches,  is  rated  fourth  class  in  carloads;  window  glass  and  rough 
and  ribbed  glass,  fifth  class.  Thus  it  appears  that  in  Southern  Classifica- 
tion territory  plate  glass  of  ordinary  size  is  rated  higher  than  in  Official  or 
Western  Classification  territories;  and  while  in  the  two  latter  territories 
plate  glass  is  rated  one  class  higher  than  window  glass,  or  rough  or  ribbed 
glass,  in  Southern  Classification  territory,  plate  glass  is  rated  two  classes 
higher  than  rough,  ribbed,  or  window  glass.  As  applied  to  the  transporta- 
tion from  St.  Louis  territory  to  Memphis  it  results  in  payment  by  the 
consignee  at  iNIemphis  of  rates  on  plate  glass  which  are  50  per  cent,  higher 
than  the  rates  on  window  glass."  — 21  I.C.C.  Rep.,  113. 

2  23  I.C.C.  Rep.,  169. 


352  RAILROADS 

under  comparatively  light  loading.  What  would  be  a  fair 
classification  there,  would  not  be  just  in  the  Far  West,  where 
the  movement  is  almost  entirely  in  carloads  and  where  the  actual 
loading  is  from  two  to  three  times  that  in  Official  Classification 
territory.  We  are  of  the  opinion  that  wool  should  be  classified 
under  the  Western  Classification  as  second  class,  1.  c.  1.,  and 
fourth  class,  c.  1.,"  etc.  The  experience  of  England  is,  of  course, 
commonly  cited  as  a  precedent.^  In  that  little  country  the 
ever-increasing  complexity  of  classification  was  precisely  parallel 
to  our  own.  From  simple  schedules  for  a  few  hundred  articles, 
the  number  of  items  steadily  increased  until  there  were  over 
4,000.  At  this  point  the  government  intervened;  and  after 
tedious  and  protracted  sessions  under  the  auspices  of  the  Board 
of  Trade  in  1888  the  whole  schedule  was  brought  down  to  1,400 
separate  items.  All  the  complicated  and  confusing  rules  were 
■harmonized  and  many  anomalies  were  cut  out.  Certain  it  is 
that  matters  should  be  firmly  taken  in  hand  in  this  country  in 
the  same  manner.  The  separate  state  classifications  and  hun- 
dreds of  conflicting  rules  and  jurisdictions  should  be  eradicated. 
Even  if  a  single  uniform  classification  be  proved  impracticable, 
as  seems  to  me  likely,  it  might  still  be  possible  to  greatly  sim- 
plify the  present  intolerable  mix-up.  There  should  be  a  repre- 
sentative of  the  Interstate  Commerce  Commission  on  each  of 
the  classification  committees,  ready  at  all  times  to  exert  pressure 
for  simplification  and  uniformity.^  The  three  main  classifi- 
cation committees,  supposing  that  they  shall  continue  to  exist, 
should  interlock  by  exchange  of  representatives.  The  greater 
the  reform  flowing  from  the  initiative  of  the  carriers  themselves, 
the  better.  Thus,  in  time,  matters  may  become  sufficiently 
standardized  as  between  the  three  main  committees  so  that, 
under  legal  compulsion  or  otherwise,  the  final  problem  of  uni- 


1  Acworth,  Elements,  etc.,  p.  99;  McDermott,  Railways,  p.  29;  Ripley, 
Railway  Problems,  chap.  XXV. 

2  22  I.C.C.  Rep.,  103,  is  a  fine  instance  of  rectification  of  unjust  classi- 
fication rules  on  vehicles  into  the  South  from  Toledo,  Ohio. 


CLASSIFICATION  353 

formity  may  be  tackled  by  recasting  the  whole  body  of  tariffs 
and  classifications  together.  But  such  a  task  at  this  writing 
appears  almost  superhuman.  Conditions  may,  of  course,  so 
shape  themselves  ultimately  that  it  may  be  brought  about. 
But,  in  the  meantime,  steady  and  persistent  pressure  should 
be  exercised  in  the  direction  of  this  final  goal.  Reform  of 
classification  practice  is  certainly  the  greatest  need  of  the  time 
in  the  transportation  field. 


VOL.  1—23 


CHAPTER  X 

THE   TRUNK   LINE  RATE   SYSTEM:     A   DISTANCE  TARIFF 

Conditions  prevalent  in  1875,  356.  —  Various  elements  distinguished, 
358.  —  The  MacGraham  percentage  plan,  360.  —  Bearing  upon  port 
differentials,  361.  —  The  final  plan  described,  363. — Competition  at 
junction  points,  368.  —  Independent  transverse  railways,  370.  —  Com- 
mercial competition,  372.  —  Limits  of  the  plan,  375.  —  Central  Traffic 
Association  rules,  376. 

The  trunk  line  freight  rate  system  effectively  demonstrates 
certain  principles  in  railwaj^  economics  which  are  of  great 
importance.  The  danger  of  arbitrary  administrative  inter- 
ference without  a  full  understanding  of  the  intricacies  of  rate 
making,  and  at  the  same  time  the  essential  soundness  of 
American  railway  practice  in  seeking  independently  to  solve 
these  complex  problems  by  equitable  means,  are  amply  illus- 
trated. The  fallacy  of  certain  objections  to  governmental  con- 
trol, on  the  other  hand,  is  revealed  with  corresponding  clearness. 
Three  principles  in  particular  deserve  mention  in  this  connec- 
tion. These  are:  (1)  that  the  element  of  distance  should  be  a 
prime  factor  in  the  final  adjustment  of  rates  as  between  com- 
peting localities ;  ^  (2)  that  cooperation  and  agreement  between 
competing  carriers  are  essential  to  any  comprehensively  fair 
system;  and  (3)  that  permanency  and  stability  of  rates  are  of 
equal  importance  with  elasticity.  That  all  three  of  these  results 
have  been  voluntarily  worked  out  in  practice  by  the  trunk  lines 
is  a  tribute  at  once  to  the  ability  and  fairness  of  their  traffic 
officials.  Standards  are  thus  established  toward  which  the 
carriers  in  the  West  and  South  should  strive,  as  soon  as  their 
local  traffic  conditions  will  permit,  in  an  endeavor  to  promote 
good  relations  with  the  shipping  and  consuming  public. 
^  Compare  chap.  IV,  p.  102,  supra. 


TRUNK  LINE  SYSTEM  355 

That  distance  tariffs,  modified  in  part  to  suit  commercial 
conditions,  are  not  only  theoretically  sound,  but  entirely 
practicable,  this  study  aims  to  prove.  The  bogey  of  German 
rate  schedules  vanishes  into  thin  air  when  it  appears  that  the 
greatest  railway  companies  in  the  United  States  have  for 
years  adopted  the  same  principles  in  working  out  their  tariffs. 
The  long  and  short  haul  rule  is  here  enforced,  not  alone  as  be- 
tween various  points  on  the  same  line,  but  also  as  between 
points  equally  distant  from  a  common  destination  on  different 
roads.  Thirty  years  ago  the  trunk  lines  conceded  the  principle, 
for  the  recognition  of  which  the  shippers  of  the  West  and 
South  are  now  so  vociferously  clamoring  before  Congress  and 
the  Federal  courts. 

This  desirable  end  could  never  have  been  attained  if  the 
several  competing  companies  had  not  been  able  to  act  in  co- 
operation. The  erroneous  popular  opinion  that  railway  com- 
petition must  be  preserved  in  the  public  interest,  had  it  been 
legally  enforced  in  this  territory  a  generation  ago,  would  have 
prevented  absolutely  any  comprehensive  solution  of  the  problem. 
Until  Congress  abandons  this  theory,  and  treats  railways  as 
essentially  monopolistic,  thereafter  to  be  protected  and  main- 
tained as  beneficent  monopolies  through  adequate  governmental 
supervision,  the  lesson  of  trunk  line  experience  will  not  have 
been  learned.  And,  finally,  the  interesting  fact  that  for  almost 
thirty  years  it  has  not  been  necessary  to  change  either  the 
main  system  or,  in  many  instances,  the  actual  rates  charged 
thereunder,  is  an  offset  to  the  contention  that  success  in  railway 
operation  is  to  be  judged  by  the  instability  of  rates,  seeking  to 
follow  constantly  the  ups  and  downs  of  commercial  conditions. 
Certain  modifications,  especially  in  export  and  import  traffic, 
or  wherever  water  rates  have  to  be  made  or  met,  are,  of  course, 
inevitable.  But  it  is  absurd  to  reason  from  this  that  railway 
tariffs  in  the  main  need  to  be  continually  jostled  about  at  the 
behest  of  the  shipping  public.  Of  course,  if  one  railway  changes 
its  rates,  all  the  rest  must  follow.     That  is  the  principal  reason 


356  RAILROADS 

why  many  of  our  rate  schedules  have  been  as  uncertain  as  the 
weather.  But  there  is  no  reason  why,  if  all  parties  in  competi- 
tion keep  good  faith  and  observe  their  tariffs,  a  schedule  of 
class  rates  for  domestic  shipments  should  not  remain  practically 
constant. 

Take  the  rates  on  raw  cotton  from  Mississippi  river  points 
like  Memphis  to  New  England  cities,  for  example.  Was  any 
staple  product  ever  subject  to  greater  fluctuations  in  price 
than  raw  cotton,  varying  as  it  has  in  the  last  few  years,  from 
five  to  fifteen  cents  a  pound?  Yet  through  it  all,  good  years 
and  bad,  whether  for  the  planter  or  the  manufacturer,  the  freight 
rate  has  stood  unchanged  at  fifty-five  cents  per  hundredweight. 
In  the  same  way,  within  the  limits  hereafter  to  be  described, 
the  trunk  line  rate  system  has  endured  for  a  generation. 
Founded  upon  sound  and,  consequently,  defensible  principles, 
it  has  promoted  good  feeling  between  railway  and  shipper. 
And,  if  the  changes  of  classification  since  1900  had  not  been 
made,  one  may  reasonably  doubt  whether  the  demand  for 
Federal  legislation  would  have  been  any  more  insistent  through- 
out the  eastern  central  states  than  it  now  is  in  New  England. 

The  causes  leading  to  the  adoption  of  a  systematic  rate 
scheme  by  the  trunk  lines  acting  jointly  ^  can  be  understood 
only  in  the  light  of  the  conditions  existing  about  1875.  The 
Baltimore   &   Ohio   Railroad  had   entered   Chicago   in   1874, 

^  The  literature  on  the  subject  is  scanty.  Much  of  the  material  has 
necessarily  been  gathered  in  the  field  by  conference  with  traffic  officials 
and  others.  My  hearty  thanks  are  due  primarily  to  Paul  P.  Rainer,  Esq., 
chief  of  the  Joint  Rate  Inspection  Bureau  at  Chicago,  for  his  willingness  to 
impart  such  explanation  of  this  comphcated  matter  as  the  delicate  respon- 
sibilities of  his  important  post  permit.  The  map  published  herewith, 
while  in  part  prepared  from  the  actual  percentage  tables,  with  his  per- 
mission and  that  of  several  important  trunk  line  officials  concerned,  has 
been  checked  and  corrected  by  his  official  copyright  map  of  January  1, 
1899.  While  the  scheme  of  graphic  representation  is  entirely  different, 
the  facts  represented  are  the  same.  I  am  also  especially  indebted  to  H.  C. 
Barlow,  Esq.,  formerly  president  of  the  Terre  Haute  &  Evansville  Railroad 
and  now  director  of  the  Chicago  Commercial  Association,  and  to  J.  W. 


TRUNK  LINE  SYSTEM  357 

after  which  tune  the  most  furious  rate  wars  between  the  four 
trunk  hues  had  been  in  progress.  The  main  dependence 
of  all  these  lines  was  still  upon  the  grain  traffic,  and  all  of  this 
was  moving  in  one  direction  toward  the  seaboard.  As  late 
as  1882,  seventy-three  per  cent,  of  the  trunk  line  toimage 
east  bound  consisted  of  such  commodities.^  Moreover,  —  and 
this  is  a  point  of  especial  importance,  —  the  bulk  of  this  grain 
originated  in  the  territory  east  of  the  Mississippi  and  south 
of  Chicago.  Over  four-fifths  of  the  eastbound  traffic  came 
from  the  states  of  Illinois,  Indiana,  Ohio,  Michigan,  and 
Pennsylvania.  The  great  northwest  and  trans-Mississippi 
territory  was  not  yet  opened  up.  Wisconsin  and  Iowa  contrib- 
uted only  about  ten  per  cent,  of  the  eastbound  tonnage,  while 
over  two-thirds  of  the  westbound  business  did  not  pass  beyond 
Illinois.^  Nor  was  the  traffic  concentrated  as  yet  in  the  larger 
cities.  Mr.  Fink  makes  it  clear  that  most  of  the  business  was 
gathered  up  by  the  trunk  lines  and  their  connections  from 
small  towns  along  the  way.  The  modern  problem  of  the  great 
city  in  competition  with  the  small  towns  was  as  yet  unknown. 

Midgley,  Esq.,  for  many  years  one  of  the  Trunk  Line  Commissioners,  for 
assistance  in  many  ways. 

The  principal  references  consulted  are  included  in  the  following  list: 

1874.  Windom  Committee  Report,  officially  known  as  Report  of  the  Select  Committee  on 
Transportation  Routes  to  the  Seaboard,  43d  Congress,  1st  Session,  Senate  Report  No. 
307,  vol.  I,  pp.  24-30;    vol.  II,  pp.,  7,  80,  283. 

1879.  Hepburn  Committee  Report,  New  York  State,  Special  Committee  on  Railroads, 
8  vols.,  pp.  3001-3006,  3102-3111. 

1886.  CuHom  Committee  Report,  49th  Congress,  1st  Session,  Senate  Report  No.  46,  vol.  II, 
p.  101. 

1887.  Typewritten  Record,  Opinion,  etc.,  of  the  Interstate  Commerce  Commission  in 
Detroit  Board  of  Trade  v.  Grand  Trunk,  etc.,  Railways.  Also  the  Toledo  case  (1889) 
and  that  of  Pratt  Lumber  Company  (1905),  I.C.C.  Reports,  vol.  II,  p.  315;  vol.  V, 
p.  106;   and  vol.  X,  p.  29. 

1890.  Senate  Report  on  the  Transportation  Interests  of  the  United  States  and  Canada,  51st 
Congress,  1st  Session,  Senate  Report  No.  847,  pp.  497,  611-036. 

1892.  Cincinnati  Freight  Bureau  case.  Copy  of  Record  before  the  Interstate  Commerce 
Commission,  etc..  United  States  Circuit  Court  for  Southern  District  of  Ohio,  In 
Equity  No.  4748,  vol.  I,  pp.  42-53.     (Reprint.) 

1900.    Report  of  United  States  Industrial  Commission,  vol.  IV,  pp.  556-562. 

1905.  Elkins  Committee,  officially  known  as  Hearings  before  the  Committee  on  Interstate 
Commerce,  United  States  Senate,  5  vols.,  vol.  II,  p.  1569,  and  vol.  Ill,  p.  2271. 

1905.    Record  of  Proceedings  before  the  Illinois  Railroad  and  Warehouse  Commission  in 

the  Matter  of  Revision  of  the  Schedule  of  Reasonable  Maximum  Rates,  etc.,  Springfield, 
especially  pp.  31  el  seg.      (Reprint.) 

1876-1905.  Proceedings  and  Circulars,  Joint  Executive  Committee  and  Joint  Rate  Com- 
mittee of  the  Trunk  Line,  etc..  Associations. 

1  Fink,  Adjustment  of  Railroad  Transportation  Rates,  etc.,  p.  16. 

2  Ibid.,  pp.  19  and  52. 


358  RAILROADS 

The  trunk  lines  had  few  feeders.  Only  the  main  stems  to 
Chicago  had  been  built.  Consequently  these  central  states 
were  served  by  a  host  of  little  cross  lines,  built  as  local  enter- 
prises, many  of  them  radiating  from  Chicago,  Cincinnati, 
Toledo,  or  Cleveland  at  right  angles  with  the  trunk  lines,  and, 
for  the  main  part,  engaged  in  an  endeavor  to  open  up  their 
territories  to  water  communication  with  the  East  by  way  of 
the  lakes  and  the  Erie  Canal.  Rail  rates,  nominally  at  least, 
were  still  high,  the  rate  first-class  Chicago  to  New  York,  for 
example,  being  about  double  its  present  figure;  and  the  condi- 
tions of  railway  operation  were  such  that  water  competition 
was  a  matter  for  grave  concern.  Every  change  in  the  lake 
situation  was  at  once  reflected  in  the  rail  rates,  violent  dis- 
locations at  the  opening  and  closing  of  navigation  in  the  spring 
and  fall  being  of  especial  importance. 

Among  these  confusing  elements  in  the  problem  of  trunk 
line  rate  adjustment  five  distinct  phases  were  prominent. 
In  the  first  place  the  four  trunk  lines  were  a  unit  in  opposi- 
tion to  the  diversion  of  traffic  to  the  Great  Lakes  and  the 
Erie  Canal.  However  much  they  might  bicker  with  one 
another  afterward,  —  apportionment  of  the  rail  business 
being  a  distinct  feature  of  the  problem,  —  their  interests  at 
the  outset  were  identical  respecting  the  necessity  of  holding 
the  business  on  land.  Water  competition  by  way  of  the 
lakes  or  the  Ohio  river  was  a  danger  common  to  them  all. 
'The  intensity  of  this  pressure  may  be  understood  from  the 
statement  that  the  trunk  lines  were  not  even  consulted  in 
making  the  Chicago-New  York  rate  on  which  the  western 
lines  pro-rated.  They  had  no  voice  in  it,  merely  accepting 
the  figure  offered  them  by  their  connections  into  Chicago.^ 
The  second  feature  of  the  problem,  namely,  the  division  of  the 
all-rail  traffic  among  the  competing  carriers,  is  immaterial  to 
the  main  question  before  us.  Thirdly,  it  was  essential  to 
the  trunk  lines  to  restrict  and  control  the  activities  of  the 
1  Windom  Committee  Report,  II,  p.  7. 


TRUNK  LINE  SYSTEM  359 

subsidiary  cross  lines  and  feeders,  most  of  which,  as  has  been 
said,  were  independent.  Many  of  these,  aside  from  having  a 
direct  interest  in  their  longest  haul  to  a  terminus  on  the  lakes 
or  the  Ohio  river,  had  been  built  by  local  capital,  and  were 
administered  in  the  interests  of  the  lake  cities  or  Cincinnati 
and  Louisville.  There  was  no  unity  whatever  in  their  policies, 
and  the  most  ridiculous  wastes  of  transportation  resulted. 
Grain  was  literally  meandering  toward  the  East  instead  of 
moving  by  a  direct  route. ^  Joint  through  rates  would  be 
made  by  the  most  extraordinary  chain  of  connecting  links  lead- 
ing to  the  seaboard  by  very  circuitous  ways.- 

A  fourth  evil,  akin  to  this,  consisted  of  the  difficulty  of 
maintaining  through  rates,  not  as  among  the  trunk  lines  who 
might  be  made  parties  to  a  pool,  but  by  reason  of  cut-throat 
competition  between  their  western  connections.^  The  agents 
of  these  western  lines  would  indiscriminately  cut  rates  to  or 
from  points  on  their  lines,  and  then  expect  their  trunk  line 
connections  to  accept  a  proportionate  shrinkage  of  the  joint 
through  rate  for  their  part  of  the  haul.  The  weaker  companies 
would,  of  course,  be  susceptible  to  such  temptations  in  order 
to  secure  the  business.  No  stable  apportionment  of  this 
western  traffic  among  the  eastern  lines  would  be  possible  until 
they  could  agree  upon  a  fair  rate  for  the  trunk  line  haul,  and 
rigidly  adhere  to  it.  And,  finally,  water  competition,  causing 
constant  fluctuations  in  the  lake  and  Ohio  river  rates,  while 
directly  potent  only  at  waterway  points,  was  continually  putting 
the  through  rates  from  these  points  out  of  line  with  the  local 
rates  from  non-competitive  inland  centres.  Or,  perhaps, 
the  Ohio  river  and  lake  rates  would  be  out  of  joint  with  one 
another.  The  Chicago  basis,  if  applied  to  Paducah,  would 
make  a  rate  on  tobacco  that  would  send  it  via  New  Orleans.'* 

^  Waste  of  transportation  as  an  economic  problem  has  already  been 
discussed  in  chap.  IX,  supra. 

2  This  persisted  even  in  1890.  Consult  51st  Cong.,  1st  sess.,  Sen.  Rep., 
No.  847,  p.  616.  ^  Hepburn  Committee,  pp.  3006-3010. 

*  Hepburn  Committee  Report,  d.  318. 


360  RAILROADS 

Products  would  go  down  the  Mississippi  after  the  lakes  had 
been  closed  by  ice.  A  considerable  amount  of  corn  was  cer- 
tainly moved  to  New  York  by  that  route.^  Some  device  for 
coordination  of  the  through  and  local  rates  —  or,  as  one  might 
put  it,  for  the  distribution  of  the  localized  shock  of  water  rate 
changes  —  was  imperatively  necessary. 

An  ingenious  rate  clerk  named  MacGraham,  in  the  offices 
of  the  Pennsylvania  Railroad,  proposed  a  comprehensive 
scheme  for  meeting  these  difficulties  which  was  first  used  for 
westbound  rates  on  December,  15,  1871.  The  Chicago-New 
York  rate  was  to  constitute  a  basis,  upon  which  all  other  rates 
were  to  be  made  in  percentages,  according  to  their  relative 
distance  from  New  York.^  Thus,  assuming  Chicago  to  be  900 
odd  miles  from  New  York,  the  rate  from  a  point  600  miles  inland 
would  be  about  sixty-six  and  two-thirds  per  cent,  of  the  Chicago 
rate,  whatever  that  might  be.  Whenever  the  lake  rate  at 
Chicago  changed,  every  other  rate  throughout  trunk  line 
territory  would  vary  in  due  proportion.  Relativity  of  charges 
would  thus  be  preserved.  Moreover,  the  shortest  route, 
"worked  or  workable,"  was  to  be  used  in  calculating  the  rates, 
the  basic  distance  being  about  920  miles  by  the  Lake  Shore 
from  Chicago  to  Dunkirk,  Ohio,  and  thence  by  the  Erie  to  New 
York.  This  would  give  compelling  effect  to  distance  as  a 
factor,  and  would  tend  to  penalize  the  roundabout  carriage 
of  goods.  More  than  this,  however,  it  would  render  the  inland 
territory  directly  tributary  to  New  York.  From  a  point,  for 
example,  fifty  or  one  hundred  miles  south  of  Chicago,  Toledo, 
or  Cleveland,  the  local  rate  into  those  towns  plus  the  through 
rate  east  to  New  York  would  always  exceed  the  rate  by  a 
direct  route  east.  For  the  hypothenuse  of  a  triangle  is  clearly 
always  shorter  than  the  sum  of  the  other  sides.  All  shipping 
points  equidistant  from  New  York  would  enjoy  equal  rates, 
those  rates  at  any  time  being  determined  by  the  state  of  water 

*  Windom  Committee  Report,  II,  p.  287. 

^  This  was  adopted  officially  by  the  trunk  lines  April  13,  1876. 


TRUNK  LINE  SYSTEM  361 

competition.  This  was  a  manifest  advantage  to  the  small 
inland  centres,  while  the  rate  on  the  lake  front  was  not  affected. 
The  trunk  lines  lost  something,  perhaps,  through  lower  rates  at 
intermediate  points;  but  the  gain  through  diversion  of  traffic 
from  the  lake  to  the  rail  lines  more  than  compensated.  For 
conditions  were  such  in  the  summer  of  1875  that  the  lake  boats 
were  prepared  to  carry  grain  for  almost  nothing.  The  railroads 
were  helpless  in  such  cases.^  The  only  real  sufferers  were  the 
short,  independent  cross  lines  and  the  lake  and  river  cities. 
Of  these,  the  former  were  reduced  to  a  status  of  mere  feeders  or 
branches  of  the  trunk  lines.  They  were  compelled  to  accede 
to  the  plan,  however,  by  threatened  refusal  of  the  trunk  lines 
to  turn  over  business  to  them  west-bound,  unless  they  recipro- 
cated with  their  grain  shipments  east-bound.^  Many  of  these 
lines  became  banlcrupt  later,  and  were  absorbed  by  the  larger 
companies.^  And,  as  for  the  cities  unfavorably  affected,  the 
scheme  based  upon  distance  was  so  obviously  fair  that  their 
protests  were  of  no  avail.* 

The  great  contest  between  the  trunk  lines  over  the  granting 
of  differentials  to  Philadelphia  and  Baltimore,  as  against  New 
York  and  Boston,  played  a  not  unimportant  part  in  the  diplo- 
macy leading  to  the  acceptance  of  the  MacGraham  system. 
The  New  York  Central,  the  Lake  Shore,  and  the  Boston  & 
Albany  roads,  of  course  eagerly  accepted  it,  because  it  promised 
aid  in  meeting  the  lake  competition  to  which  they  were  pecu- 
liarly exposed.  The  Pennsylvania  and  the  Erie,  lying  con- 
siderably further  from  Lake  Erie,  would  also  be  benefited, 

'  Hepburn  Committee  Report,  p.  3112. 

2  Record  Proceedings  Railroad  Commission  of  Illinois  in  Revision  of 
Maximum  Freight  Rates,  1905,  pp.  32  and  88. 

3  55th  Cong.  1st  ses.,  Sen.  Doc.  No.  39,  p.  33.  The  Hepburn  Com- 
mittee (p.  3111)  describes  the  local  jealousies  which  prevailed. 

■•  Chicago  has  never  become  reconciled  to  it,  however,  alleging  that  it 
injures  her  commercially.  Compare  Windom  Committee,  1874,  vol.  i,  p. 
24;  51st  Cong.,  Lstses.,  Sen.  Rep.  No.  847,  1890,  p.  611  et  seq.;  Elkins  Com- 
mittee, 1905,  pp.  1433,  2538  et  seq.;  and  Record  Proceedings  lUinois  Rail- 
road Commission  on  Revision  of  Maximum  Rates,  1905.  Cf.  p.  378,  infra. 
Seaport  differentials  are  discussed  in  chap.  XI,  infra. 


362  RAILROADS 

operating  as  they  did  in  a  territory  naturally  tributary  to  them, 
but  exposed  to  drainage  to  the  lakes  by  lateral  lines.  But  the 
Baltimore  &  Ohio,  ever  since  its  entry  into  Chicago  in  1874, 
had  been  a  thorn  in  the  flesh  of  the  others.  The  territory 
along  its  line  was  so  far  from  the  lakes  that  it  had  little  to  fear 
from  water  competition  at  intermediate  points  between  Chicago 
and  the  seaboard.  Would  it  accept  a  plan  primarily  intended 
to  meet  a  danger  which,  while  injuring  its  powerful  rivals,  was 
of  less  consequence  to  itself?  Fortunately  for  the  scheme,  it 
was  based  upon  the  solid  principle  that  distance  was  of  pre- 
ponderating influence  in  the  adjustment  of  rates.  The  entire 
contention  of  the  Baltimore  &  Ohio  and  the  Pennsylvania  for  a 
differential  rate  to  Baltimore  and  Philadelphia  below  New 
York  rested  upon  this  same  principle.  The  distance  from 
Chicago  to  the  southern  ports  was  less.  Consequently,  they 
insisted,  they  were  entitled  to  offer  a  lower  rate.  The  Mac- 
Graham  scale  and  the  port  differentials  were  thus  logically 
connected.  They  stood  or  fell  together.  The  MacGraham 
plan  materially  aided  the  Baltimore  &  Ohio  in  making  good  its 
demands.^  It  was  acceptable,  therefore,  by  reason  of  this 
collateral  advantage. 

Another  factor  in  the  situation  appealed  to  the  Pennsylvania 
and  the  Baltimore  &  Ohio.  Their  lines  to  tide  water  were 
about  seventy-five  and  one  hundred  miles  shorter,  respectively, 
than  the  shortest  line  to  New  York.^  In  the  division  of  the 
joint  through  rate  between  a  chain  of  connecting  railway  lines 
this  was  of  great  advantage.  It  always  aids  the  shorter  line 
if  pro-rating  is  based  upon  mileage.  A  feeder  one  hundred 
miles  long  pro-rating  with  a  trunk  line  one  thousand  miles  in 
length  would  be  entitled  to  only  one-eleventh  of  the  total  rate. 
Were  the  trunk  line  only  eight  hundred  miles  long,  the  neutral 
road  might  claim  one-ninth.     This  seemingly  slight  difference 

'  Hepburn  Committee,  p.  3104. 

2  Distances  are  given  in  the  Thurman-Washburne-Cooley  Advisory 
Commission  on  Differentials,  etc.,  of  1882. 


TRUNK  LINE  SYSTEM  363 

might  mean  several  hundred  thousand  dollars  more  earnings 
to  the  neutral  road  or  feeder,  if  it  turned  over  its  business  to 
the  short  line.^  Any  emphasis  upon  distance  as  a  general  princi- 
ple strengthened  the  Baltimore  &  Ohio  in  securing  patronage 
from  other  roads  by  this  means.  The  other  trmik  lines,  through 
acceptance  of  the  MacGraham  scale,  conceded  the  distance 
principle,  and  with  it,  coincidently,  the  pro-rating  practice. 

After  three  years'  experience,  the  MacGraham  scale  was 
readjusted  to  conform  more  closely  to  the  cost  of  service  princi- 
ple. The  plan,  as  thus  revised,  is  the  one  still  in  force.^  It 
recognizes  that  railway  charges  should  be  proportioned  to  the 
length  of  haul,  so  far  as  actual  costs  of  haulage  are  concerned; 
but  it  first  eliminates  those  constant  elements  in  cost  which  do 
not  vary  with  distance.  The  original  MacGraham  scale  made 
no  such  distinctions.  The  expenses  at  terminals,  such  as  load- 
ing and  unloading,  are,  of  course,  entirely  independent  of  the 
distance  covered  by  the  shipment.  These,  being  determined 
roughly  by  experimentation,  are  first  deducted  from  an  assumed 
Chicago  rate.  From  the  remainder  the  rate  per  mile  by  the 
shortest  route  to  New  York  (920  miles)  is  then  calculated  by 
simple  division.  This  rate  per  mile  is  then  applied  to  the 
distance  to  any  intermediate  point,  and  the  terminal  charge  is 
again  added.  Thus  a  rate  is  found  which  is  reduced  to  a  per- 
centage of  the  original  Chicago  base  rate. 

1  Hepburn  Committee,  pp.  3188,  3195.  "Taking  the  Indianapolis  & 
St.  Louis  Railroad,  for  example,  running  to  Indianapolis,  where  they  can 
connect  with  all  the  trunk  lines.  .  .  .  Assume  that  company  had  only  100 
cars  of  business  per  daj';  if  the  property  went  to  Baltimore,  that  company 
would  receive  §800  per-  day  more  than  if  it  came  to  New  York,  pro-rating 
the  rates  by  mileage  to  both  places;  now  S800  a  day,  there  being  300 
working  daj's  in  the  year,  is  a  difference  of  $240,000  a  year." 

2  The  revised  table  of  percentages  is  reprinted  in  full  in  Hepburn  Com- 
mittee Report,  p.  3107  et  seq. 


364  RAILROADS 

For  Illustration  1  Cents 

per  100  lbs. 

Chicago  to  New  York 25 

Less  fixed  charges  on  both  ends  of  the  line 6 

The  basis  of  rate  for  computation  being  the  remainder,  or     19 
Using  short  hne  mileage  920  miles,  Chicago  to  New  York, 

would  yield  a  rate  per  mile 00.0206 

Shojt  line  mileage  Indianapohs  to  New  York,  833  miles, 

yields  a  rate  of 17.2 

Plus  six  cents  fixed  charges,  as  above,  makes       .      .      .      .     23.2 

The  percentage  of  New  York  rate  being 93  per  cent. 

Which  is  the  present  percentage  basis  Indianapohs  to  New 

York 

Short  Hne  mileage  Frankfort,  Indiana,  to  New  York  is  881 

miles,  which  would  yield  at  the  rate  of  00.0206  cents  per 

mile 18 

Plus  terminal  charges 6 

Which  is  96  per  cent,  of  25  cents 24 

The  revised  system  provides  in  theory  for  an  absolutely 
constant  rate  per  ton  mile.     It  is  a  rigid  mileage  tariff  in  every 

1  The  official  rule  from  Proceedings  of  the  Joint  Executive  Committee, 
June  12  and  13,  1879,  is  as  follows: 

"  First.  —  That  from  all  points  being  less  distant  from  New  York  than 
Chicago  new  percentages  be  adopted  for  making  up  rates  on  eastbound 
freight  upon  the  following  basis :  the  percentages  from  points  of  the  same, 
or  no  greater  distance  than  Chicago,  to  continue  as  heretofore. 

"Second. —  That  six  cents  per  100  pounds  be  first  deducted  from  an 
assumed  rate'of  25  cents  per  100  pounds,  Chicago  to  New  York,  said  de- 
duction to  represent  the  fixed  charges  at  both  ends  of  long  or  short  hauls. 

"Third.  —  That,  after  such  deduction,  the  rate  per  mile,   which  the 

remainder,   or  19  cents  per  100  pounds,  produces  from  Chicago  to  New 

York,  shall  be  charged  per  mile  from  all  common  points  named  in  the  first 

section,  according  to  the  percentages    of   distance    shown  by  the  table 

adopted  at  Chicago,  April  30,  1876,   to  which  result  so  computed  the  6 

cents  per  100  pounds  of  fixed  charges  first  above  deducted  shall  be  again 

added,  and  the  percentage  of  the  Chicago  rate  of  25  cents,   produced  by 

such  additions,  shall  thereafter  constitute  the  percentage  of  the  Chicago 

rate,  which  shall  be  subsequently  charged  from  the  points  named  in  first 

section. 

For  Illustration 

Chicago  to  New  York,  per  100  lbs 25c. 

Less  fixed  charges,  per  100  lbs [     ]  g  * 

Basis  of  rate  for  computation 19 

Cohimbus,  Ohio,  as  at  present  70  per  cent,  of  Chicago  net  rate,  will  be    ...     .      13.3c 
To  which  add  the  fixed  charges 6 

And  the  new  percentage  from  Columbus  will  hereafter  be  77^  per  cent,  of  19. 3o 

Chicago,  in  lieu  of  70  per  cent.,  as  at  present. 


TRUNK  LINE  SYSTEM  365 

respect.  The  original  MacGraham  scale  had  been  so  in  theory, 
but  not  in  practice.  As  amended  in  conformity  with  a  sound 
economic  principle,  it  had,  moreover,  one  important  practical 
advantage  over  the  original  scale.  It  yielded  more  revenue 
at  all  the  intermediate  points.^  Local  rates  would  be  higher 
as  thus  calculated  than  they  were  originally.  It  would  be 
unjust  to  ascribe  undue  importance  to  this  motive  on  the  part 
of  the  roads  in  the  adoption  of  the  new  system.  That  the  plan 
yielded  additional  revenue,  while  obviously  more  just  in  theory, 
was  naturally  no  objection  to  its  acceptance. 

The  fruits  of  all  this  process  of  adjustment  are  depicted 
upon  the  accompanying  diagram.  Viewing  it  in  a  large  way, 
and  reserving  details  for  later  consideration,  we  may  compare 
it  to  a  topographical  contour  map.  The  several  rate  zones 
are  thus  analogous  to  a  series  of  levels  or  steps  rising  from  east 
to  west.  Our  cross  section  of  these  along  a  line  from  Pittsburg 
to  Burlington,  Iowa,  makes  this  relation  plain.  Another  cross 
section  at  right  angles  to  the  first  from  Louisville,  Kentucky, 
to  Lansing,  Michigan,  and  beyond,  shows  how  these  levels  are 
arranged  in  a  plane  from  north  to  south.  These  steps  form  a 
sort  of  irregular  amphitheatre  opening  toward  the  east,  with  its 
main  axis  lying  in  a  direction  slightly  south  of  west  toward 
St.  Louis.  Or,  more  correctly,  these  rate  zones,  pursuing  our 
analogy  to  a  topographical  contour  map,  indicate  a  broad  valley 
opening  toward  the  east.  Along  the  bottom  of  this  freight-rate 
valley  lie  the  great  direct  trunk  lines  converging  from  Chicago 
and  St.  Louis.  Throughout  the  State  of  Illinois  the  valley 
opens  up  onto  a  plateau,  somewhat  grooved  in  the  middle  at 
Peoria,  where  the  direct  lines  from  the  west  cross  a  neutral 
field  tributary  neither  to  Chicago  nor  St.  Louis  exclusively. 

'  Hepburn  Committee,  p.  3104.  A  hypothetical  instance  will  serve  as 
illustration.  Suppose  a  point  with  an  80  per  cent,  rate  on  the  old  schedule. 
Wlien  Chicago  paid  25  cents,  the  rate  to  this  point  would  be  20  cents. 
Under  the  new  scheme  the  intermediate  rate  would  be  80  per  cent,  of  19 
cents,  or  15.2  cents,  plus  6  cents  terminal  charge,  making  a  total  of  21.2 
cents.  This  is  84.8  per  cent,  of  the  Chicago  rate  instead  of  80  per  cent,  as 
before.     Compare  table,  p.  373,  infra. 


366 


RAILROADS 


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TRUNK  LINE  SYSTEM  367 

This  general  description  harmonizes  with  the  apt  figure  used 
by  that  master  mind  in  railway  economies,  Albert  Fink.  Speak- 
ing of  this  situation,  he  says,  "The  trunk  lines  are  nothing  but 
great  arteries  of  commerce,  like  rivers,  only  w^ith  this  difference : 
the  rivers  never  run  across  each  other,  the  territory  from  which 
they  draw  their  supplies  is  distinct  and  well  defined."  Since 
his  time,  by  reason  of  co-operative  action  for  a  generation,  the 
confusing  maze  of  railway  lines  has  now  been  reduced  to  a 
single  comprehensive  system.  Cross-currents  of  trade  hither 
and  thither  have  been  united  or  articulated  in  such  a  way  as, 
speaking  in  terms  of  freight  charges,  to  cause  the  great  internal 
commerce  of  the  country  to  flow  do%Mihill  toward  the  seaboard 
in  an  orderly  and  reasonable  way.  The  inequalities  incident 
to  commercial  competition  have  been  modified,  or,  to  revert 
to  our  original  figure,  eroded;  so  that  one  may  literally  speak 
of  the  products  of  the  country  as  flowing,  like  rivers,  in  more 
or  less  natural  channels  over  the  railway  lines  from  the  great 
interior  basin  towards  the  Atlantic  seaboard. 

The  mathematical  precision  of  the  method  of  computation 
heretofore  described,  while  theoretically  applicable  to  a  series  of 
parallel  roads  in  a  flat  country,  free  from  either  water  competi- 
tion, the  competition  of  cross  railway  lines,  or  the  competition 
of  towns  and  cities  of  unequal  size  and  importance,  obviously 
requires  modification  to  suit  the  actual  traffic  conditions  in 
this  densely  populated  trunk  line  territory.  The  process  of 
adjustment  has  been  gradual  and  necessarily  tentative.  Every 
influence  brought  to  bear  has  been  subversive  of  systematic  ar- 
rangement, tending,  that  is  to  say,  to  amend  the  scheme  out  of 
all  semblance  to  mathematical  order.  After  reading  volumes 
of  the  Proceedings  of  the  Joint  Rate  Committee,  filled  "wdth 
petitions  of  railways,  towns,  and  individuals  for  exception  to 
the  general  rules,  one  is  surprised  to  find  that,  after  all,  the 
scheme  is  so  well  ordered  as  it  is.  It  has  been  held  true  only 
by  rigid  adherence  to  the  rule  that  by  the  shortest  "workable 
and  worked  route"  no  intermediate  place  shall  be  charged  more 


368  RAILROADS 

than  is  charged  to  any  point  beyond.  In  other  words,  the  long 
and  short  haul  principle  is  consistently  observed.  Space  does 
not  permit  a  discussion  of  all  of  the  factors  which  have  tended  to 
modify  the  original  simple  scheme.  Three  alone  may  be  con- 
sidered as  illustrative  of  the  rest.  These  are:  (1)  the  effect  of 
railway  competition  at  the  important  junction  points;  (2)  the 
influence  of  the  independent  cross  lines  of  railway;  and  (3) 
commercial  competition  between  producing  or  distributing 
centres. 

The  effect  of  railway  competition  at  junction  points  is 
revealed  at  once,  upon  inspection  of  the  map,  by  the  general 
law  that  the  boundary  line  of  zones  lies  immediately  west 
of  the  large  cities.  Notice  the  location  of  Cleveland;  Warren, 
Pennsylvania;  Newark,  Ohio;  Dayton,  Fort  Wayne,  Detroit, 
Port  Huron,  Cincinnati,  Indianapolis,  Louisville,  Lansing, 
Logansport,  Terre  Haute,  Peoria,  and  Decatur.  Columbus, 
Toledo,  and  Evansville,  Indiana,  are  about  the  only  exceptions. 
In  nearly  every  case  the  theoretical  zone  boundary  has  been 
shifted  in  such  a  way  that  the  rate  rises  just  west  of  the  import- 
ant competitive  point.  The  reason  is  obvious.  Rates  being 
held  down  at  these  points,  and  no  greater  rate  being  possible  at 
any  other  point  further  east,  conditions  must  be  equalized 
upwards,  immediately  the  depressing  influence  of  competition 
is  removed.  Each  zone  level  is  of  necessity  an  average  of  a 
theoretic  constantly  rising  scale  from  east  to  west.  Places 
immediately  west  of  an  important  junction  point  are  raised 
somewhat  above  their  theoretical  grade  as  a  compensation  for 
those  places  on  the  westerly  side  of  each  zone  whose  rate  is  held 
down  below  their  theoretical  level  by  the  exigency  of  competi- 
tion at  the  next  large  town.  Or,  to  be  specific,  Indianapolis 
may  hold  down  the  rate  to  ninety-three  per  cent,  of  the  Chicago 
rate  farther  west  than  otherwise  would  be  the  case.  In  fact, 
by  reason  of  its  paramount  importance  as  a  railway  centre, 
it  has  held  down  the  rate  so  far  west  that  for  purposes  of  equali- 
zation the  rate  west  of  it  immediately  jumps  to  one  hundred 


TRUNK  LINE  SYSTEM  369 

per  cent.  For,  as  will  be  observed,  on  inspection  of  the  map, 
the  96-97  per  cent,  zone  is  interrupted  at  this  point;  the  92-95 
per  cent,  zone  being  extended  unduly  far  west  and  the  one 
^  hundred  per  cent,  zone  being  extended  inordinately  far  east, 
until  the  two  meet  just  west  of  Indianapolis.  Detailed 
study  of  the  schedules  and  maps  will  reveal  many  similar 
instances. 

The  converse  of  the  proposition  that  important  junction 
points  lie  near  the  western  zone  boundaries  is  found  in  the  fact 
that,  where  competition  is  absent,  the  zones  sweep  much  farther 
east  than  mathematically  would  be  prescribed.  In  other 
words,  wherever  competition  is  less  keen,  the  percentage  rates 
remain  high.  Were  competition  entirely  uniform  in  its  geo- 
graphical distribution,  the  several  zones  would  be  parallel, 
sweeping  evenly  clear  across  the  map.  Illustration  of  this 
circumstance  will  be  found  in  the  extension  of  the  87  per 
cent,  zone  far  to  the  east,  along  the  Ohio  river,  in  fact  nearly 
to  Parkersburg,  West  Virginia;  or,  again,  in  the  110  per  cent, 
territory  which  extends  nearly  to  Louisville.  This  latter  rate 
has  been  recently  amended,  as  will  be  shown  later;  but  for 
many  years  continued,  as  here  represented,  abnormally  far  to 
the  east.  In  both  these  instances  the  railway  facilities  along 
the  river  are  monopolized  by  the  Baltimore  &  Ohio  as  a  trunk 
line.  The  only  competition  is  due  to  the  Cincimiati,  Hamilton 
&  Dayton  and  Norfolk  &  Western,  both  of  which  work  their 
traffic  from  New  York  north.  The  population  and  traffic 
density  being  at  the  same  time  low,  a  relatively  high  level  of 
rates  has  resulted.  Sometimes,  also,  it  may  happen  that  in 
these  outlying  regions  the  shortest  line  "workable  and  worked" 
to  the  seaboard  may  not  be  due  east,  but  may  proceed  north 
until  a  junction  with  a  trunk  line  can  be  effected.^ 

^  Thus  from  Ironton,  in  the  87  per  cent,  zone  south  of  Columbus,  Ohio; 
the  distance  to  Columbus  is  127  miles,  added  to  638  miles  from  Columbua 
to  New  York  makes  a  total  of  765  miles.  Multiplying  this  by  00.0206 
makes  it  87  per  cent,  of  the  Chicago  rate. 

VOL.  I — ^24 


370  RAILROADS 

The  influence  of  independent  transverse  lines  of  railway 
has  been  of  great  importance  in  shifting  the  zone  boundaries 
from  their  theoretical  location  to  conform  to  practical  require- 
ments.    Study  of  the  map  permits  a  second  important  generali- 
zation.    Not  only  does  the  boundary  of  the  zones  usually  lie 
just  west  of  large  cities,  the  course  of  the  boundary  at  the  same 
time  frequently  follows  the  location  of  important  independent 
transverse  railways.     The  zone  boundary,  in  other  words,  lies 
just  west  of  the  cross  railway  line.     For  example,  the  western 
boundary  of  the  100  per  cent.  Chicago  zone,  after  leaving  a 
point  on  the  Illinois  Central,  is  defined  from  north  to  south  by 
the  course  of  the  Chicago  &  Eastern  Illinois  Railroad,  and 
below  Terre  Haute  by  the  line  of  the  Terre  Haute  &  Evansville. 
Similarly,  practical  exigencies  determined  the  odd  shape  of  the 
110  per  cent,  zone,  formed  like  a  great  distorted  boot  leg. 
The  western  boundary  of  this  110  per  cent,  zone  from  Peoria 
south  closely  follows  the  Peoria,  Decatur  &  Evansville  road 
nearly  to   the  Ohio   river.     Similarly  conditioned  by  railway 
lines  are  the  boundaries  north  and  south  of  Indianapolis,  and 
especially  north  and  south  of  Fort  Wayne,  Indiana.     In  other 
cases  where  the  transverse  lines  do  not  cross  nearly  at  right 
angles  with  the  trunk  line,  the  zone  boundary  will  follow  one 
railway  for  some  distance,  and  then  skip  across  to  another 
railway  whose  general  direction  is  more  nearly  perpendicular 
to  the  trunk  lines.     Thus,  from  Toledo  to  Lima,  Ohio,  the 
western  boundary  of  the   76-80  per  cent,   zone  follows  the 
Cincinnati,  Hamilton  &  Dayton,  cutting  the  Baltimore  &  Ohio 
and  Pennsylvania  trunk  lines  at  right  angles;    and  then  it 
jumps  across  to  the  east  until  it  strikes  the  sweep  of  the  Toledo 
&  Ohio  Central,  which  carries  it  down  almost  to  Columbus. 
Similarly,  the  western  boundary  of  the  66|  per  cent,  zone 
follows   the   line   of   the    Pittsburg    &    Western   north    from 
Warren,  in  order  that  that  line  may  participate  in  New  York 
business  by  working  its  line  north  via  Painesville  on  the  Lake 
Shore. 


TRUNK  LINE  SYSTEM  371 

Why  is  it  apparently  necessary  that  these  zone  boundaries 
should  follow  along  just  west  of  the  cross  railway  lines?  The 
reason  may  be  made  clear  by  a  concrete  instance.  Originally 
and  until  about  1891,  Louisville,  Kentucky,  instead  of  having 
the  100  per  cent.  Chicago  rate,  as  at  present,  enjoyed,  on  the 
base  of  its  distance  from  New  York,  about  96  or  97  per  cent, 
of  the  Chicago  rate.  In  other  words,  the  96-97  per  cent,  zone 
shown  on  our  map  as  interrupted  at  Indianapolis,  partly  for 
reasons  already  mentioned,  originally  swept  across  the  map  all 
the  way  from  Grand  Rapids  to  the  Ohio  river.  This  territory 
from  Chicago  south  is  served  by  the  Monon  Railway  (Chicago, 
Indianapolis  &  Louisville),  whose  line,  not  fully  indicated  on 
the  map,  thus  lay  partly  in  100  per  cent.,  partly  in  96  per 
cent.,  and  partly  in  97  per  cent,  territory.  An  important 
part  of  the  traffic  of  the  Monon,  as  well  as  of  the  other 
independent  north  and  south  lines,  consists  of  business  coming 
in  from  the  east  at  the  north  and  worked  south,  or  coming 
in  from  the  east  at  the  south  and  worked  north.  Or,  in 
other  words,  this  line  subsisted  in  part  upon  indirectly  routed 
tonnage  from  New  York,  let  us  say,  destined  for  Louisville, 
but  reaching  it  by  way  of  Chicago  junction  points.  Freight  thus 
hauled  around  two  sides  of  a  triangle,  instead  of  by  a  direct  line, 
as  described  in  Chapter  VIII, ^  constitutes  one  of  the  important 
sources  of  waste  of  transportation  energy.  The  Monon  by  such 
tactics  is  able  to  participate  in,  and  to  profit  by,  a  much  larger 
volume  of  tlirough  business.  That  is  to  say,  its  proportion  of 
the  entire  haul  is  much  greater  than  it  would  be  if  the  business 
moved  by  the  shortest  line.  Moreover,  when  indirectly  routed, 
the  Monon,  often  securing  for  its  trunk  line  connections  tonnage 
for  the  east  which  would  naturally  go  to  other  competitive 
trunk  lines,  is  able  to  exact  a  higher  pro-rating  than  even  its 
extended  lateral  haul  would  justify  on  a  strictly  distance  basis. 
Such  circumstances  always  greatly  enhance  the  profitableness 
of  lateral  hauls  to  minor  connecting  roads.  It  is  obvious  that 
'  Page  264,  infra. 


372  RAILROADS 

much  of  this  transverse  haulage  would  be  impossible  wherever 
the  lateral  railway  lines  traverse  different  zones  of  rates.  It 
might  haul  traffic  from  its  100  per  cent,  end  to  connect  at  its 
96  per  cent,  end  with  a  trunk  line  for  the  east,  but  not  in  the 
opposite  direction.  The  Monon,  always  in  a  position  to 
disturb  the  rate  situation,  through  connection  with  all  the 
competing  trunk  lines,  insisted  upon  equality  of  rates  all  along 
its  lines.  To  do  this,  the  100  per  cent,  zone  had  to  be  extended 
east  to  Indianapolis.  Thereafter  the  Monon  could  profitably 
"work  its  line  in  both  directions."  This  illustration  will  serve 
to  show  why  ordinarily  the  zone  boundaries  conform  as  closely 
as  possible  to  the  course  of  the  lateral  roads.  The  confusion 
which  would  be  engendered,  were  the  Peoria,  Decatur  &  Evans- 
ville  to  be  partly  in  the  110  per  cent,  and  partly  in  higher  per- 
centage territory,  while  still  insisting  upon  its  right  to  work 
its  line  both  ways,  can  readily  be  imagined.  To  avoid  such 
difficulties,  the  present  modification  of  strictly  distance  per- 
centages had  to  be  adopted. 

The  third  dominant  influence,  above  mentioned,  in  modi- 
fying the  mathematical  precision  of  percentages  based  alone 
upon  the  distance  from  New  York,  has  been  the  commercial 
competition  of  traders  and  cities  one  with  another.  The  aim 
of  all  rate  adjustment  should  be,  and  in  fact,  so  far  as  possible 
in  American  railway  practice,  is  to  equalize  conditions,  so  that 
the  widest  possible  market  shall  result.  Producers  or  traders 
in  each  city  demand  access  on  even  terms  to  all  territory  natur- 
ally tributary  to  them  by  reason  of  their  geographical  location. 
Each  particular  railroad  sees  to  it  that  its  own  patrons  and 
cities  are  "held"  in  all  parts  of  these  markets,  as  against  the 
efforts  of  competing  railways  to  promote  the  welfare  of  their 
own  constituencies.  Consequently,  the  Proceedings  of  the 
Joint  Rate  Committee  are  filled  with  discussions  as  to  the  ad- 
visability of  amending  general  rules  here  and  there  to  suit 
local  conditions.  Minor  changes  are  continually  being  effected. 
Grand  Rapids,  Michigan,  once  in  100  per  cent,  territory,  asked 


TRUNK  LINE  SYSTEM 


373 


for  a  90  per  cent,  rate,  and  in  1891  secured  a  reduction  to  96 
per  cent.^  Louisville,  once  in  97  per  cent,  territory,  is  now  a 
100  per  cent,  point.  Shifts  in  both  directions  have  frequently 
occurred,  as  the  following  table  of  percentages  shows :  ^  — 


Basis 

Detroit 

Toledo 

Sandusky 

Cleveland 

April  13,  1876   

June  23,  1879  '    

85 

81.5 

75.5* 

78 

78 

81.5 

75.5 

78 

71 

78 
75.5 

78 

65 
73.5 

April  14,  1880   

Present  (1900) 

70 
71 

A  number  of  changes  were  made  in  1887  in  order  to  conform 
to  the  long  and  short  haul  clause.  Flint,  ]\Iichigan,  for  example, 
was  reduced  from  95  to  92  per  cent.;  Ashtabula,  Ohio,  from  71 
to  67;  while  Springfield,  Ohio,  was  raised  from  82  to  83  per 
cent.^  Detroit  has  been  most  active  in  prosecuting  its  claims 
for  a  reduced  percentage.  But  the  Interstate  Commerce 
Commission  in  1888  upheld  the  present  status.  A  recent  minor 
change  is  indicative  of  the  forces  which  must  be  dealt  with. 
Evansville,  Indiana,  on  the  Ohio  river,  according  to  our  map, 
is  a  110  per  cent,  point.  Vincennes,  Indiana,  lies  just  north  of 
it  in  the  108  per  cent,  triangular  zone.  Since  this  plate  was 
made,  Evansville  has  been  reduced  to  105  and  Vincennes  to 
103  per  cent.,  respectively.  This  is  substantially,  I  am  told, 
on  a  mileage  basis.  The  reason  for  the  amendment  is  that 
certain  important  industries  are  located  at  these  points. 
Either  to  favor  them  specially  or  to  remove  a  pre-existing 
disability  in  competition  with   other  towns,  this  change  was 

1  Cf.  Industrial  Commission,  IV,  p.  556. 
^  Record,  Detroit  Board  of  Trade  case. 
'  Consult  p.  195,  supra. 

*  Computed  apparently  by  regular  rules,  but  on  the  basis  of  only  4 
cents  terminal  charges  instead  of  the  usual  6. 

*  Joint  Rate  Circular,  No.  815. 

*  Demanding  a  70  per  cent,  rate  on  a  strict  mileage  basis,  and  also, 
because  the  pro-rating  basis  with  Western  lines  is  that  figure. 


374  RAILROADS 

insisted  upon  by  the  railways  interested  in  their  prosper- 
ity. By  tentative  processes  of  adjustment  hke  this  the  pres- 
ent general  relations  have  been  established.'^  They  have 
been  kept  constant  only  by  the  steady  resistance  of  the 
majority  of  carriers  to  action  which  is  in  the  interest  of  a 
few.  Judged  by  results,  it  would  appear  that  the  broad  view 
has,  in  the  main,  prevailed. 

The  actual  situation  resulting  from  the  above-named 
causes,  it  should  be  observed,  is  not  quite  as  simple  as  our  map 
makes  it  appear.  Most  of  the  zones  are  in  fact  subdivided  into 
minor  gradations.  Thus  the  closely  dotted  zone  designated 
"86-90  inch"  is  constituted  of  an  87  per  cent,  area  up  as  far  as 
the  railway  from  Dayton  to  Indianapolis;  while  the  rest  of  it  is 
broken  up  into  little  88,  89,  and  90  per  cent,  areas,  respectively. 
The  same  thing  occurs  elsewhere.  Our  map  generalizes  the 
results,  in  an  effort  to  bring  out  the  zone  relationships  as  fully  as 
is  technically  possible  in  a  single  diagram.  Certain  of  the 
zones,  however,  such  as  the  60,  66|,  100,  and  110  per  cent, 
territories,  are  bounded  exactly  as  here  represented. 

As  for  direction,  the  original  scale  was  intended  only  for 
eastbound  traffic.  Westbound  rates  were  lower  and  more 
regular.  But  the  system  worked  so  well  that  it  was  soon 
extended  to  cover  the  westbound  business.  Owing  to  diffi- 
culties of  routing,  in  order  to  transport  by  the  shortest  line 
into  Chicago,  these  westbound  percentages  were  often  quite 
different  from  those  in  the  opposite  direction.^  Detroit,  for 
instance,  for  some  time  prior  to  1886,  enjoyed  a  70  per  cent, 
rate  west  bound,  while  its  percentage  in  the  opposite  direction 
was  78.^     But,  after  the  passage  of  the  Act  to  Regulate  Com- 

1  23  I.C.C.  Rep.,  684,  on  wool  from  Detroit,  for  example.  13  Idem, 
300  concerns  Evansville  rates  and  those  across  in  Kentucky. 

2  Trunk  Line  Association  Circular  No.  523,  issued  July  26,  1883,  gives 
tables  of  these  percentages  in  each  direction.  Present  westbound  per- 
centages are  given  in  ihid.,  No.  751,  issued  April  3,  1899. 

'  Typewritten  record,  Detroit  Board  of  Trade  case,  1887-88,  Interstate 
Commerce  Commission  Office,  pp.  244-251. 


TRUNK  LINE  SYSTEM  375 

merce  in  1887,  efforts  were  made  to  harmonize  the  differences.^ 
At  the  present  time  the  rates  east  and  west  are  in  most  cases  the 
same. 

At  this  point  it  is  essential  to  understand  the  Hmitations 
within  which  this  percentage  system  is  confined.  It  does 
not  necessarily  determine  the  exact  rate  to  be  applied  in  practice 
from  every  little  station  in  trunk  line  territory.  For,  in  the 
first  place,  it  concerns  only  the  so-called  common  points; 
that  is  to  say,  points  where  competition  of  two  or  more  carriers 
is  effective.  Purely  local  stations  are  charged  an  "arbitrary" 
into  the  nearest  common  point.^  But,  inasmuch  as  throughout 
this  much  be-railroaded  country  most  shippers  are  less  than 
twenty  miles  from  the  next  line,^  and  since,  moreover,  the 
arbitrary  can  never  raise  the  local  rate  above  the  rate  to  the 
next  common  point  beyond,*  the  scale  is  practically  effective 
everywhere.  A  more  important  consideration  is  the  fact  that 
this  scale,  even  for  common  points,  does  not  positively  fix  the 
rate.  It  merely  provides  a  minimum  below  which  rates  shall 
not  be  reduced,  except  by  authority  of  the  roads  acting  jointly. 
It  is  a  minimum,  not  a  maximum,  schedule  in  every  sense. 
Its  provisions  are  never  promulgated  in  the  form  of  tariffs  as 
such.  They  are  rarely  known  to  shippers,  but  serve  only  as  a 
guide  to  traffic  officials.  The  Interstate  Commerce  Commis- 
sion, in  sanctioning  the  system,  has  expressly  recognized  this 
fact.^  Moreover,  these  percentage  rates  applied  at  first  to 
"classified"  tonnage.     They  were  soon,  however,  extended  to 

1  Under  a  committee  headed  by  the  late  J.  T.  R.  McKay,  of  Cleveland. 
The  Official  Classification  and  the  75  cent  New  York-Chicago  rate  first- 
class  were  then  adopted  for  good. 

2 12  I.C.C.  Rep.,  186,  on  points  about  New  York,  for  example. 

'  I  am  told  that  rivers  intervening,  to  cut  off  cartage  by  wagon  to 
competing  lines,  have  sometimes  effectively  influenced  the  charges. 

*  The  long  and  short  haul  principle  has  always  been  given  great 
weight  here.  All  exceptions  to  it  were  removed  in  good  faith  by  the 
carriers  when  the  Act  of  1887  was  passed.  Cf.  Windom  Committee,  vol. 
I,  p.  26;  vol.  Ill,  pp.  42,  134,  and  283. 

*  G.  C.  Pratt  Lumber  Co.  v.  Chicago,  Ind.  &  Louisville  Railway  Co., 
decided  January  27,  1904. 


376  RAILROADS 

include  the  great  bulk  of  commodity  or  special  rates  which  are 
independently  made.  And  I  am  informed  by  the  chairman 
of  the  Trunk  Line  Association  that  the  MacGraham  table  was 
applied  to  special  rates  —  such  as  sugar,  coffee  and  molasses  — 
as  early  as  1871. 

Other  exceptions  to  the  applicability  of  this  percentage 
system  deserve  mention,  although  they  are  of  relative  unim- 
portance. Principal  among  these  is  the  confusion  engendered 
in  Illinois  territory  through  the  entry  of  the  western  lines  into 
Chicago.  Throughout  their  constituencies,  by  reason  of  the 
sparse  population,  freedom  from  competition,  inequality  of 
east,  and  westbound  tonnage,  and  low-grade  freight,  western 
railroad  rates  per  ton  mile  are  very  much  higher  than  on  the 
trunk  lines.  Moreover,  they  are  naturally  desirous  of  as  long 
a  haul  as  possible,  namely  into  Chicago.  To  turn  over  their 
local  Illinois  traffic  to  the  trunk  line  feeders  exposes  them 
financially  to  the  same  losses  as  those  above  mentioned  in  the 
case  of  lateral  independent  lines  further  east.  But  these 
western  lines,  being  stronger,  have  insisted  upon  recognition 
of  their  claims  to  a  proportion  of  the  through  rate  which  would 
at  least  "pay  for  their  axle  grease."^  The  result  is  that 
throughout  Illinois,  especially  in  the  north  and  toward  the 
Mississippi,  the  distance  principle  is  considerably  distorted,  as 
our  map  clearly  shows.  The  percentage  system  practically 
excludes  freight  "from  beyond,"  the  rates  on  that  being 
determined  by  other  rules.^ 

East  of  the  Central  Traffic  Association  territory  shown  on 
our  map  the  same  percentage  system  is  extended  to  points  in 
New  York  and  Pennsylvania.^  Suppose,  for  example,  the 
rate  were  desired  from  Columbus,  Ohio,  to  Albany,  New  York, 
or  any  other  point  between  Buffalo  and  New  York  City.     The 

'  U.  S.  Industrial  Commission,  vol.  IV,  p.  562. 

^  Cf.  8  Int.  Com.  Rep.,  169,  on  grain  rates  from  Minnesota  and  trans- 
Missouri  points;  as  also  23  I.C.C.  Rep.,  195. 

'  Cf.  Joint  Committee  Information  No.  298  of  January  13,  1900,  giv- 
ing all  these  rules  in  detail. 


TRUNK   LINE    SYSTEM  377 

rate  from  Columbus  to  New  York  City  would  first  be  determined 
as  a  percentage  of  the  Chicago-New  York  rate,  under  the  system 
already  described.  Then  from  Columbus  to  Albany  the  rate 
would  be  prescribed  as  a  new  percentage  of  this  percentage. 
The  initial  western  points,  however,  are  not  determined  in- 
dividually, but  are  comprehended  in  large  groups.  Thus  the 
rate  from  all  points  in  the  72-78  per  cent,  territory,  showTi  on 
our  map,  to  Albany,  New  York,  is  96  per  cent,  of  what  the  rate 
would  be  from  those  points  to  New  York  City.  Syracuse  has 
76  and  Utica  87  per  cent.,  respectively,  of  the  rate  from  any 
point  in  this  72-78  per  cent,  territory.  From  points  beyond 
Chicago,  taking,  that  is  to  say,  more  than  100  per  cent,  of  the 
New  York-Chicago  rate,  the  percentages  of  the  rate  to  New 
York  City  applying  to  Albany,  Syracuse,  and  Utica  are  cor- 
respondingly modified  to  96,  84,  and  91,  respectively.  Other 
complications,  such  as  the  addition  of  arbitraries  to  Boston  and 
New  England  points  or  the  subtraction  of  differentials  to  Balti- 
more and  Philadelphia,  follow.  But,  in  the  main,  conforming 
always  to  the  long  and  short  haul  principle,^  rates  to  all  local 
stations  are  prescribed  within  narrow  limits  by  means  of  a 
small  number  of  these  fixed  points.  The  system  is  the  same, 
although  details  may  vary.  Everything  interlocks  and  is 
harmoniously  related  on  the  distance  basis. 

Rates  from  one  point  to  another  within  the  Central  Traffic 
Association  territory  showTi  on  our  map  now  alone  remain  for 
consideration.  These  cannot,  of  course,  be  adjusted  on  a 
percentage  basis,  inasmuch  as  such  traffic  may  not  be  east  or 
west  bound  at  all,  but  may  consist  of  shipments  in  any  direction. 
There  is  no  logical  reason  why  they  should  interlock  with  east 
or  westbound  through  rates  when  the  traffic  is,  perhaps, 
moving  locally  north  and  south.  Nevertheless,  the  long  and 
short  haul  principle  is  observed  with  the  same  fidelity.  A  rigid 
distance  tariff  for  short  hauls,  the  limits  of  which  are  prescribed 
by  the  rates  for  long  hauls  under  the  MacGraham  schedule, 
1  Cf.  Windom  Committee,  vol.  II,  pp.  42  and  134. 


378  RAILROADS 

prevails.^  For  distances  up  to  75  miles  this  conforms  closely 
to  the  rates  originally  prescribed  by  the  Ohio  legislatm-e.  For 
greater  distances  it  is  much  lower  than  the  Ohio  tariff.^  Thus 
the  Ohio  rate  for  350  miles  is  87.5  cents,  while  the  C.  F.  A. 
(Central  Freight  Association)  scale  is  only  42  cents.  The 
Ohio  scale  for  200  miles  is  50  cents,  the  C.  F.  A.  rate  for  the 
same  distance  is  only  33  cents.  Thus  it  appears  that  this  C. 
F.  A.  tariff,  applicable  to  interstate  business  and  beyond  control 
of  any  state  legislature,  has,  in  reality,  been  voluntarily  adopted 
by  the  interested  railroads.  The  tariff  is  only  a  minimum 
scale,  below  which  the  roads  agree  not  to  reduce  rates,  and 
above  which  the  actual  rates  often  rise.^  Nevertheless,  the 
fact  remains  that  these  rates,  according  to  distance,  are  so 
much  lower  than  the  Illinois  Railroad  Commission's  tariff 
that  Chicago  and  other  distributing  centres  throughout  the 
State  of  Illinois  claim  that  it  works  great  hardship  to  them. 
The  situation  in  Illinois  is  geographically  peculiar.  Its  great 
commercial  centre  is  in  the  extreme  northeastern  corner,  while, 
at  the  same  time,  the  greatest  extension  of  the  state  is  north 
and  south.  These  circumstances,  coupled  with  an  interstate 
(C.  F.  A.)  tariff  lower  than  the  Illinois  official  tariff  under  which 
Chicago  merchants  must  ship  out  their  goods,  enable  Detroit, 
Indianapolis,  and  Cincinnati  to  undersell  Chicago  in  its  own 
state.  Chicago  can  be  equalized  there  only  by  special  or  secret 
rates.''  Other  local  centres,  like  Quincy,  Illinois,  joined  with 
Chicago  in  this  complaint  to  the  Illinois  Railroad  Commission 
that  their  rates  were  too  high.^  Think  of  it!  Shippers  com- 
plaining that  a  government  rate  was  too  high,  and  requesting 

1  Known  as  the  C.  F.  A.  scale.  Full  text  is  printed  in  Illinois  Railroad 
Commission  Proceedings  in  Maximum  Freight  Rate  case,  Record,  etc., 
1905,  p.  43.     See  also  p.  97. 

2  Detailed  comparison  is  made  in  ibid.,  p.  45.     See  also  p.  17. 

3  Illinois  Railroad  Commission  Proceedings  in  Maximum  Freight  Rate 
case,  Record,  etc.,  1905,  p.  152. 

*  Exhibit  A  15,  ibid.,  shows  this  by  means  of  a  map.  See  also  Senate 
(Elkins)  Committee,  1905,  vol.  Ill,  p.  2271. 

^  The  double  disability  of  these  smaller  places  is  stated  in  ibid.,  p.  7. 


TRUNK    LINE    SYSTEM  379 

that  the  railway  tariff  (C.  F.  A.  schedule)  be  adopted  in  its 
place!  Is  that  not  evidence  that  reasonable  treatment  of  its 
shippers  by  railway  companies  is  appreciated  by  the  public? 
Without  undue  extension  further  details  of  this  interesting  con- 
troversy cannot  be  given.  It  will  suffice  to  state  that  in  Decem- 
ber, 1905,  the  Illinois  Railroad  Commission  ordered  a  reduction 
of  its  official  schedule  by  20  per  cent.,  in  an  attempt  to  reduce 
its  rates  to  conform  more  nearly  to  the  C.  F.  A.  railway  tariff. 
The  evils  incident  upon  two  conflicting  governmental 
authorities.  State  and  Federal,  each  attempting  to  regulate 
rates  independently,  are  clearly  indicated  in  the  preceding 
paragraph.  The  Interstate  Commerce  Conunission  has  been 
brought  flatly  up  against  them  in  one  of  its  recent  Texas  cases. ^ 
Local  and  interstate  rates  must  inevitably  be  adjusted  with 
reference  to  one  another,  so  complex  are  the  conditions  of  com- 
mercial competition.  While  the  plain  people  remained  un- 
satisfied that  any  real  Federal  regulative  power  existed,  it  was 
inevitable  that  the  number  of  arbitrary  state  tariffs,  like  those 
of  Illinois  and,  more  recently,  of  Missouri,  should  tend  to  in- 
crease. But  now  since  the  amplified  Federal  powers  under  the 
laws  of  1906  and  1910,  any  clash  between  the  two  must  result 
in  limitations  placed  upon  state  activity. 

1  Chapter  XVIII,  infra. 


CHAPTER  XI 

SPECIAL  RATE  PROBLEMS:     THE  SOUTHERN  BASING  POINT 

SYSTEM;    TRANSCONTINENTAL   RATES;    PORT 

DIFFERENTIALS,  ETC. 

Contrast  between  the  basing  point  and  trunk  line  systems,  380.  —  Natural 
causes  in  southern  territorj^,  SSL  —  Economic  dependence,  38L  — 
Wide-spread  water  competition,  382.  —  High  level  of  rates,  382.  — 
The  basing  point  system  described,  383.  —  Its  economic  defences,  384. 
—  Early  trade  centres,  384.  —  Water  competition  once  more,  385.  — 
Three  types  of  basing  point,  387.  —  Purely  artificial  ones  exemplified, 
388.  —  Different  practice  among  railroads,  390.  —  Attempts  at  re- 
form, 39L  —  Western  v.  eastern  cities,  391.  —  Effect  of  recent  indus- 
trial revival,  392.  —  The  Texas  group  system,  393.  —  An  outcome  of 
commercial  rivalry,  394.  —  Local  competition  of  trade  centres,  395.  — 
Possibly  artificial  and  unstable,  395.  —  The  transcontinental  rate  sys- 
tem, 395.  —  High  level  of  charges,  396.  —  Water  competition,  396.  — 
Carload  ratings  and  graded  charges,  398.  —  Competition  of  jobbing 
centres,  398.  —  Canadian  difTerentials,  400.  —  "Milling-in-transit" 
and  similar  practices,  40L  —  "Floating  Cotton,"  402.  —  "Substitution 
of  tonnage,"  403.  —  Seaboard  differentials,  403.  —  Historically  con- 
sidered, 403.  —  The  latest  decision,  403.  —  Import  and  export  rates, 
404-409. 

The  rate  system  in  the  southern  states  contrasts  sharply 
with  that  of  trunk  Hne  territory.^  Its  most  unsatisfactory  fea- 
ture is  its  complete  violation  of  the  distance  principle.     Public 

1  Among  the  best  references  on  the  subject  are  the  following:  McPher- 
8on,  Railway  Freight  Rates,  pp.  85-92,  especially  on  the  Virginia-Carolina 
cities;  Rep.  U.  S.  Internal  Commerce,  1876,  App.,  pp.  1-20;  U.  S.  Senate 
(Elkins)  Committee  Hearings,  1905,  Digest,  App.,  III.  The  principal 
I.C.C.  cases  are  as  follows:  1891.  Social  Circle;  4  I.C.C.  Rep.,  744.  — 
1892.  GeorgiaR.  R.  Com.;  5 /dem,  324.  —  1893.  Troy,  Ala.;  4  Int.  Com. 
Rep.,  348.  In  Railway  Problems.  —  1894.  Summerville,  Ga.;  4  Idem, 
521.  — 1894.  Cordele,  Ala.;  6  I.C.C.  Rep.,  343.  —  1895.  Tifton,  Ga.; 
6  Int.  Com.  Rep.,  343.  —  1897.  Lagrange,  La.;  7  Idern,  431.  —  1897. 
Griffin,  Ga.;  7  Idem,  224.  —  1899.  Dawson,  Ga.;  8  Idem,  142.  In  Rail- 
way Problems.  —  1899.  Aberdeen,  S.  C;  10  I.C.C.  Rep.,  289.  —  1899. 
Wilmington,  S.  C;  9  Idem,  118. —  1900.  Piedmont;  6  Int.  Com.  Rep.. 
588.-1900.  Hampton,  Fla.;  8  Idem,  503.-1900.  Danville,  Va.;  8 
Idem,  409.     In  Railway  Problems. 


THE  BASING   POINT   SYSTEM  381 

dissatisfaction  was  long  voiced  by  a  large  number  of  complaints 
before  the  Interstate  Commerce  Commission  in  the  early  days, 
—  a  cessation  of  these  complaints  since  1900,  however,  was  the 
result  of  the  nullification  of  the  law  by  judicial  interpretation, 
rather  than  an  indication  of  any  acquiescence  of  the  public 
in  the  scheme.  Next  to  settlement  of  the  problem  of  trans- 
continental rates,  a  reasonable  adjustment  of  the  southern 
situation  is  one  of  the  important  tasks  confronting  the 
Federal  authorities. 

Certain  natural  features  of  southern  territory  are  connected 
with  its  peculiar  rate  system.  The  first  of  these  is  its  scattered 
and  relatively  thin  settlement.  Density  of  population  varies 
between  one-third  and  one-fourth  of  that  in  the  northern  states. 
This  greatly  limits  the  volume  of  local  business.  In  the  second 
place,  the  largely  agricultural  character  of  the  country,  yielding 
a  traffic  predominantly  of  low  grade,  has  had  a  great  effect. 
Much  attention  being  devoted  to  cotton,  there  is  little  local 
interchange  of  freight.  The  business,  moreover,  is  largely 
seasonal  in  character.  In  the  early  days,  at  least,  practically 
all  of  the  profits  of  the  carriers  had  to  be  made  between  Septem- 
ber and  January.  This  concentration  of  interest  in  the  move- 
ment of  the  cotton  crop  is  now  rapidly  being  supplanted  by  a 
much  more  general  movement  of  traffic;  but  the  rate  system 
in  force  is  an  outgrowth  of  the  conditions  prevalent  in  the  early 
days. 

The  entire  dependence  of  this  territory  for  manufactured 
goods  upon  the  northeastern  states,  and  for  foodstuffs  upon  the 
West,  has  had  a  profound  effect,  we  have  seen,  upon  its  railway 
development.^  The  predominant  direction  of  traffic  is  rendered 
quite  peculiar  by  contrast  with  trunk  line  territory.  In  the 
North,  the  principal  railroads  lie  parallel,  east  and  west;  in  the 
South,  they  are  radially  distributed  outward  from  Atlanta  like 
the  spokes  of  a  wheel.     Imagine  a  triangle  with  its  apex  at  this 

'  Chapter  I  affords  a  historical  review  of  railway  development  in  the 

United  States. 


382  RAILROADS 

city,  —  the  focus  of  all  transportation  interests  in  the  South,  — 
and  with  its  other  two  angles  lying  at  New  York  and  Chicago 
respectively.  The  hollow  centre  of  this  triangle,  as  appears 
by  the  accompanying  map,  is  occupied  by  the  Allegheny 
mountain  chain.  The  movement  of  traffic  historically  along 
the  western  side  of  this  triangle  has  been  overwhelmingly 
southward;  at  one  time  the  disproportion  south-bound  from 
western  territory  being  as  thirteen  to  one.^  Along  the  eastern 
side  of  this  triangle,  —  that  is  to  say  parallel  with  the  Atlantic 
seaboard,  —  the  preponderance  of  tonnage,  by  bulk  and 
probably  by  value  as  well,  has  been  toward  the  north.  In  this 
direction  cotton  in  the  early  days,  and  latterly  lumber,  have 
moved  from  southern  fields  and  forests  to  northeastern  markets. 
In  Virginia-Carolina  territory,  today,  about  three-fifths  of  the 
loaded  mileage  is  north  bound.  The  uneven  distribution  of 
traffic  is  still  further  complicated  by  the  excess  of  tonnage  east- 
bound  in  trunk  line  territory  along  the  northern  side  of  our 
triangle,,  above  mentioned.  This  general  description  explains 
many  of  the  abnormalities  in  freight  rates  throughout  this 
territory.  Bulky  staples  moving  one  way,  while  manufactured 
goods,  high  in  value  but  more  concentrated  in  weight,  go  the 
other,  greatly  complicate  the  problem  of  economical  operation. 

Another  omnipresent  complication  in  the  southern  states  is 
the  widespread  existence  of  water  competition.  The  situation 
in  the  South  in  this  regard  is  not  unlike  that  of  England.  Its 
entire  territory  is  threaded  with  a  series  of  more  or  less  naviga- 
ble watercourses  which  penetrate  from  the  seaboard  or  the 
Mississippi  river,  far  into  the  interior.  Here  again  is  a  physical 
peculiarity  of  the  southern  territory,  which  historically  explains, 
even  if  it  does  not  fully  justify,  as  we  shall  see,  certain  peculiar- 
ities of  its  freight  rate  system. 

The  first  general  characteristic  of  the  southern  system  is  the 
relatively  high  level  of  freight  rates.     Bearing  in  mind  that  the 

*  Rep.  Internal  Commerce,  1876,  App.,  p.  28;  Senate  (Elkins)  Com- 
mittee, 1905,  Digest,  App.  Ill,  p.  71. 


THE  BASING  POINT  SYSTEM  383 

distance  from  New  York  to  Chicago  is  practically  the  same  as 
from  New  York  to  Atlanta,  the  freight  rate,  first-class,  on  the 
trunk  lines  was,  in  1900,  75  cents  per  hundredweight  as  against 
$1.14  to  Atlanta.  Sixth-class  rates  then  stood  to  one  another 
as  25  cents  and  45  cents  respectively,  the  relatively  high  ones 
being  in  the  South.  Reference,  for  example,  to  the  table  on 
page  349,  will  bring  out  this  contrast  at  the  present  time  in 
another  way.  According  to  this  the  rates  in  the  South  are  not 
higher  than  in  the  West  for  the  same  distance.  The  dispro- 
portionately high  charges  in  the  South,  however,  occur  mainly 
in  the  field  of  local  rates.  And  it  is  the  local,  rather  than  the 
through,  charges,  which  cause  the  present  dissatisfaction.  The 
principal  complaint  concerning  through  rates  is  that  they  are 
made  up  principally  as  the  sum  of  locals  based  upon  Ohio  or 
Mississippi  gateways. '^  Whenever  such  sums  of  locals  have 
given  place  to  unbroken  through  rates,  a  large  measure  of 
satisfaction  to  shippers  has  resulted.  And  then,  finally,  it 
should  be  observed  that  certain  peculiarities  of  the  classifica- 
tion system  somewhat  increase  the  relatively  high  grade  of 
charges  throughout  this  territory,-  tending  to  support  the 
allegation  that  rates  are  unreasonably  high. 

The  so-called  basing  point  system  is  the  second  fundamental 
peculiarity  of  southern  rate  adjustment.  It  has  already  been 
discussed  in  connection  with  local  discrimination.^  This  basing 
point  system,  although  not  absolutely  confined  to  the  South, 
has  been  more  highly  developed  here  than  elsewhere.  In 
principle  it  is  simply  this :  certain  cities  are  established  as  basing 
points,^  and  rates  to  all  other  places  in  that  neighborhood  are 

^  Cf.  the  Commerce  Court  case;  February  session,  1912,  No.  40.  Also 
c/.  p.  251,  supra. 

2  Page  311,  supra.  ^  Pp.  239-252,  supra. 

■*  A  list  of  these  on  the  Louisville  and  Nashville  R.  R.  is  given  in  U.  S. 
Senate  (Elkins)  Committee,  1905,  Digest,  App.  Ill,  pp.  84-93.  There  ia 
a  distinction  between  a  basing  and  a  common  point.  The  latter  is  a  com- 
petitive junction,  to  which  rates  are  made  on  combination  of  locals.  The 
basing  point  enjoys  a  still  further  advantage  in  that  it  gets  even  lower  than 
the  combination  rates. 


384  RAILROADS 

made  by  adding  to  the  through  rate  into  the  basing  point,  the 
local  from  that  city  to  the  final  destination.  Since  local  rates 
in  the  South,  based  upon  slender  local  traffic,  are  always  ex- 
ceedingly high,  this  appears  to  confer  a  very  great  advantage  in 
the  matter  of  charges  on  the  cities  thus  favored.  The  way  in 
which  this  system  is  opposed  to  the  long  and  short  haul  principle 
in  law  has  also  been  discussed  in  another  connection.^  On  the 
face  of  things  it  certainly  appears  unjust  that  goods  should  be 
transported  directly  through  the  place  to  which  they  are  ulti- 
mately to  go;  and  after  being  hauled  to  the  basing  point  with  a 
heavy  charge  for  that  haul,  should  thereafter  be  brought  back 
again  with  the  addition  of  a  second  high  local  rate  for  the 
service.     And  yet  that  very  commonly  occurs. 

A  number  of  economic  defences  for  the  basing  point  system 
have  been  urged  by  the  carriers  at  different  times.  The  most 
substantial  one  is  that  the  basing  points,  historically,  were 
originally  important  trade  centres  and  are  still  intimately 
related  to  the  business  customs  of  the  South.^  These  trade 
centres,  it  is  alleged,  were  not  made  by  the  railroads :  they  were 
in  existence  before  the  railroads  were  constructed.  They  are 
an  outgrowth  of  the  agricultural  system  of  the  region.  In 
the  West  a  farmer  may  take  a  sample  of  his  grain  to  the  nearest 
town  and  sell  the  whole  crop  by  that  sample.  No  such  trans- 
action is  possible  with  cotton  and  tobacco.  Each  shipment 
must  be  sampled,  weighed  and  classified  on  its  own  merits. 
Such  grading  cannot  take  place  at  local  stations.  Convenient 
commercial  centres  are,  therefore,  a  necessity,  serving  for  the 
proper  concentration  of  products.  These  trade  centres,  more- 
over, arising  in  connection  with  the  sale  of  staple  products  of 
the  soil,  became  natural  distributing  or  jobbing  points.  The 
planters  naturally  buy  in  the  places  to  which  they  resort  to  sell 
their  crops,  often  employing  the  same  merchant.^    As  such 

*  Page  474,  infra. 

2  Senate  (Elkins)  Committee  Hearings,  Digest,  App.  Ill,  pp.  73  and  78. 

3  CJ.  chap.  IV,  p.  125,  supra.    Also  I.C.C.  Opinion,  No.  861,  1906. 


THE  BASING  POINT  SYSTEM  385 

natural  trading  centres,  these  southern  towns  are  forced  to 
compete  with  the  older  established  distributing  cities  up  north. 
At  this  point  a  second  defence  of  the  basing  point  system  arises.^ 
It  is  urged  that  a  decentralization  of  jobbing  trade  in  a  sparsely 
settled  or  newly  developed  territory  can  be  effected  only  by 
means  of  encouragement  through  peculiarly  favorable  rates  to 
offset  the  strength  of  the  remoter  great  cities.  The  plausibihty 
of  this  defence,  however,  is  considerably  weakened  by  the  fact 
that  under  the  peculiar  southern  classification  system,  carload 
ratings  are  largely  absent.^  Therefore,  as  it  appears,  the  local 
jobber  in  the  South  competes  under  a  disability  as  compared 
with  New  York  and  Cincinnati  which  is  no  less  at  the  basing 
point  than  in  the  small  town.  Still  a  third,  and  probably  a 
valid,  defense  of  this  violation  of  the  distance  principle  by  the 
use  of  basing  points,  is  the  paucity  of  local  business.  It  is 
alleged  that  in  the  North  the  competitive  points  are  so  near 
together,  and  the  volume  of  competitive  business  is  so  large, 
that  it  pays  to  reduce  the  charges  at  immediate  points.  In 
the  South,  on  the  other  hand,  competitive  points  are  so  far 
apart  and,  relatively  speaking,  the  local  tonnage  is  so. small, 
that  the  adoption  of  such  a  policy  would  be  ruinous.^ 

The  most  prominent  defence  of  the  basing  point  system 
brought  forw^ard  at  all  times,  and  greatly  emphasized  in  pro- 
ceedings before  the  Interstate  Commerce  Commission,  is  the 
widespread  existence  of  water  competition.  Carriers  allege 
that  in  order  to  secure  any  portion  of  the  traffic  at  many  points, 
low  rates  must  be  offered,  quite  irrespective  of  the  charges  to 
intermediate  inland  stations.  They  affirm  that  to  lower  all 
rates  to  this  "compelled"  competitive  level,  would  deplete 
their  revenues  and  lead  to  bankruptcy.  This  has  been  the 
main  excuse  for  the  persistent  violation  of  the  long  and  short 


1  H.  R.  Meyer's,  Government  Regulation  of  Railroad  Rates,  pp.  196 
and  292-303.  ^  Page  310,  chap.  IX,  supra. 

^  Senate  (Elkins)  Committee,  1905,  p.  65:  80  per  cent,  of  net  earnings 
on  the  Louisville  &  Nashville  in  1886  were  from  local  business. 
VOL.  I — 25 


386  RAILROADS 

haul  clause  by  carriers  in  the  southern  states  down  to  the  present 
time.  The  evidence  goes  to  show,  however,  that  on  the  lesser 
streams,  at  least,  the  steamers  are  so  small,  their  service  so 
irregular,  and  the  incidental  risk  of  damage,  cost  of  insurance 
and  other  expenses  of  transhipment  are  so  great,  that  the  rail- 
roads practically  control  the  business.^  Furthermore,  in  many 
places  it  appears  that  the  water  lines  were  either  owned  by  the 
railroads  or  appeared  in  league  with  them;  or  else  that  a  divi- 
sion of  the  business  had  been  effected  by  which  the  little  river 
steamers  were  accorded  a  certain  proportion  of  the  low  grade 
freight.^  Such  facts  have  been  established  before  the  Interstate 
Conmierce  Commission,  for  example,  in  the  so-called  Dawson 
case  concerning  the  Chattahoochee  river;  on  the  Ocmulgee 
at  Macon  in  the  Griffin  and  Hawkinsville  cases;  at  Montgomery 
in  the  Troy  case;  and  on  the  St.  Johns  river  at  Palatka,  Florida, 
in  the  Hampton  case.  A  competent  witness  has  declared  in  fact 
that  there  is  "no  more  real  water  competition  at  many  of  these 
places  than  in  the  Rocky  Mountains."  ^  Probably  the  poten- 
tiality of  competition  is  somewhat  greater  today  with  improve- 
ment of  the  larger  navigable  waterways.  It  seems  to  be  real 
at  Chattanooga  since  the  construction  of  the  Mussel  Shoals 
canal;  but  that  it  has  in  late  years  been  effective  at  Nashville 
seems  open  to  question.  The  practical  disappearance  of  the 
Mississippi  river  traffic  also  points  to  the  decline  in  importance 
of  the  great  rivers  as  rate  regulators,  except  in  respect  of  the 
carriage  of  ore,  lumber,  and  coal.  Whether  the  National 
Waterways  movement  will  ever  succeed  in  its  revival  is,  it 
seems  to  me,  open  to  serious  question.^ 

1  Cf.  pp.  386,  591,  612  and  642,  infra,  for  example. 

2  24  I.C.C.  Rep.,  228,  for  Bowling  Green,  Ky.,  clearly  establishes  such 
a  community  of  interest  between  rail  and  water  lines. 

3  Senate  Interstate  Commerce  Committee,  Hearings,  1897.  Twelfth 
Annual  Rep.  I.C.C,  p.  59,  well  describes  the  situation. 

<  Compare  chap.  XX,  p.  638,  infra.  Other  references  on  internal 
waterways  are  as  follows:  1905.  Senate  (Elkins)  Committee,  Digest,  App. 
IV.  — 1908.  Report  Inland  Waterways  Commission,  2  vols.  —  1910. 
Reports  U.  S.  National  Waterways  Commission,  especially  Document  11. 


THE  BASING  POINT  SYSTEM  387 

Analyzing  these  several  grounds  of  defence,  a  distinction 
should  be  made  at  the  start  between  three  varieties  of  basing 
point.  This  is  not  clearly  brought  out  in  the  numerous  deci- 
sions upon  rates  in  southern  territory.  In  the  first  group  are 
the  old  natural  trading  centres,  usually  once  blessed  with 
effective  competition  by  water,  even  if  at  the  present  this  is  of 
limited  character.  Savannah  and  Montgomery,  Alabama,  are 
of  this  type.  Then,  secondly,  there  are  the  great  railroad 
centres  like  Atlanta  and  Birmingham.  These  are  modern 
creations  without  water  competition  of  any  sort,  although  the 
rivalry  of  railroads  with  one  another  is  exceedingly  keen. 
Until  recently,  moreover,  this  competition  has  been  over  such 
widely  divergent  routes  that  agreement  has  been  difficult  and 
consolidation  impossible.^  And,  then,  in  the  third  place,  there 
are  the  basing  points  which  seem  to  be  absolutely  artificial. 
A  number  of  these  are  to  be  found  in  the  southeastern  part  of 
Georgia,  such  as  Cordele,  Americus,  Albany,  etc.  In  these 
cases  the  only  criterion  which  seems  to  have  been  adopted  is 
that  the  place  shall  have  attained  sufficient  importance  to 
enable  it  to  compel  some  carrier  to  give  it  special  privileges  in 
the  matter  of  rates.  As  was  tersely  stated  in  a  leading  case  — 
Cordele  at  that  time  not  having  been  made  a  basing  point :  ^ 

"Cordele  is  not  treated  by  defendant  roads  as  a  competitive  point, 
because  it  is  not  a  sufficiently  large  distributing  point,  and  it  is  not 
such  a  distributing  point  because  it  is  not  treated  as  a  competitive 
point.  Hence  it  appears  that  the  roads  seek  to  excuse  their  wrong- 
doing by  offering  the  results  of  the  wrong  in  justification.  Judged 
by  its  results,  tliis  system  of  rate  making  is  at  variance  with  all  the 
equality  provisions  of  the  act  to  regulate  commerce." 

The  subsequent  experience  in  this  last  case  is  significant. 
One  of  the  carriers  at  Cordele  having  afterwards  discovered  the 

Traffic  History  of  the  Mississippi  river.  CJ.  also,  Railway  Age  Gazette, 
June  2  and  30,  1911  and  Jan.  12,  1912:  Bulletin  21,  Bureau  of  Railway 
Economics;  and  the  Bulletins  of  the  U.  S.  Census. 

1  Compare  vol.  II,  on  raihoad  consohdation  in  this  territory,  since 
1900.  ''  6  I.C.C.  Rep.,  343. 


388  RAILROADS 

advantage  to  itself  in  making  this  towTi  a  basing  point,  all  the 
other  railroads  were  compelled  to  acquiesce.  Such  a  thing  has 
happened  frequently  throughout  the  South;  with  the  result  that 
many  places  have  been  given  strongly  preferential  rates  for  no 
other  reason  than  the  arbitrary  decision  of  some  one  of  the 
carriers.  Even  the  railroads  themselves  recognize  this  fact. 
They  often  deplore  the  necessity  for  reducing  rates  because 
of  action  by  competitors  at  some  particular  point;  but  no 
option  remains.  It  is  with  reference  to  this  third  class  of 
purely  artificial  basing  points  that  the  most  dissatisfaction 
among  shippers  arises. 

The  awkward  and  unreasonable  situation  is  well  exemplified 
in  a  very  recent  case,  —  important,  also,  because  it  was  the  first 
to  be  decided  by  the  Interstate  Commerce  Commission  under  its 
new  and  enlarged  powers.  The  location  of  Ashburn  in  south- 
eastern Georgia,  a  county  seat  with  a  population  of  about 
2,200,  is  shown  with  references  to  surrounding  places  by  the 
map  on  opposite  page.^  It  lies  in  the  centre  of  an  irregular 
quadrilateral,  the  corners  of  which  are  occupied  by  Cordele, 
Albany,  Tift  on  and  Fitzgerald.  It  has  no  commercial  stand- 
ing at  present,  but,  being  as  large  at  least  as  Tifton,  aspires  to 
become  a  distributing  centre  in  its  immediate  neighborhood. 
Yet  from  every  direction  its  rates  are  made  by  a  combination 
upon  these  surrounding  towns.  The  disparity  is  illustrated 
by  the  charges  from  New  York,  which  are  $1.42  per  hundred- 
weight, first  class,  as  compared  vnth  SI.  17  to  all  the  neighboring 
places.  Examination  of  the  history  of  these  favored  towns 
shows,  however,  that  they  have  acquired  their  favored  status 
as  basing  points,  neither  because  they  were  originally  important 
trading  centres,  nor  because  they  enjoyed  water  competition. 
Two  of  them,  actually,  are  as  remote  from  streams  as  is  Ashburn. 
The  fact  is  that  the  competition  of  western  and  eastern  dealers 
with  one  another,  backed  in  each  case  by  local  railroads  having 
routes  or  affiliations  either  northeast  or  northwest,  has  brought 
1  23  I.C.C.  Rep.,  140. 


THE  BASING  POINT  SYSTEM 


389 


about  their  establishment  as  basing  points.  Neither  is  Ash- 
burn  today  more  of  a  local  point  than  either  Tifton  or  Cordele 
when  they  were  first  granted  lower  rates.  As  one  examines 
further,  it  appears  that  this  keenness  of  trade  competition 
between  East  and  West,  —  that  is  to  say,  from  Baltimore  and 


New  York  as  against  Cincinnati  and  Chicago,  etc., — which 
has  brought  Atlanta  into  prominence  and  made  it  finally  the 
key  to  the  entire  southern  rate  arch,i  ^as  in  the  same  manner 
led  to  the  special  favors  granted  to  one  town  as  against  another. 
1  Cf.  p.  248,  supra. 


390  RAILROADS 

In  this  case  the  Interstate  Commerce  Commission  ordered  an 
equahzation  between  all  five  points.  It  is  to  be  hoped  that 
this  special  case  may  be  a  point  of  departure  for  a  general 
reform  in  the  immediate  future  of  the  entire  iniquitous  scheme 
of  local  favoritism  which  has  too  long  been  allowed  to  exist. 
The  entire  artificiality  and  even  at  times  iniquity  of  the 
basing  point  system  is  admitted  in  the  following  brief  for  the 
railways  in  the  Alabama  Midland  case  before  the  Supreme 
Court  of  the  United  States.  "There  may  be,"  it  is  conceded, 
"a  few  mere  'railroad  junctions'  in  the  South,  which,  owing 
to  the  ignorance  or  corruption  of  certain  railroad  officials,  have 
been  arbitrarily  '  called '  competitive  points  and  which  '  receive ' 
certain  arbitrary  'concessions'  in  rates  to  which  they  are  not 
justly  entitled.  There  may  be  also  a  few  strictly  local  stations 
in  the  South,  which  are  not  even  'railroad  junctions,'  where 
arbitrary  and  unfair  'concessions'  in  rates  have  been  made  by 
certain  corrupt  railroad  officials,  to  enhance  the  value  of  prop- 
erty owned  at  such  stations  by  said  officials,  or  by  their  relatives 
or  friends  .  .  .  [but  they  are]  the  offspring  of  ignorance  or 
corruption  and  should  not  be  recognized  by  the  courts."  This 
artificiality  is  also  proven  by  the  difference  of  practice  which 
exists  on  the  various  southern  roads.  ^  The  worst  offender  and 
most  defiant  opponent  of  the  government  from  the  inception 
of  Federal  regulation,  has  been  the  Louisville  &  Nashville 
Railroad.  The  Southern  Railway  introduced  the  long  and 
short  haul  principle  in  the  main  on  its  through  line  to  Atlanta 
long  ago.  On  the  Atlantic  Coast  Line  few  violations  of  the 
distance  principle  exist,  and  the  condition  is  improving.  No 
basing  points  whatever  exist  in  South  Carohna;  and  the  state 
railroad  commissions  in  general  are  working  for  betterment. 
Neither  the  Chesapeake  &  Ohio  nor  the  Norfolk  &  Western, 
operating  alike  in  sparsely  settled  regions,  find  it  necessary  to 
violate  the  distance  principle.     One  of  the  curses  of  the  scheme, 

1  Senate  (Elkins)  Committee,  1905,  Digest,  App.,  Ill  p.  93;    gives  a 
list  of  new  basing  points  created  since  1887. 


THE  BASING  POINT  SYSTEM  391 

however,  is  that  irregularity  of  one  carrier  may  compel  its  neigh- 
bors to  adopt  a  policy  which  they  recognize  as  unjust.  Only 
by  compulsion  applied  to  all  alike  can  a  just  solution  be  had. 
A  determined  effort  was  made  in  1880  by  the  carriers 
themselves  to  apply  the  trunk  line  rate  system,  based  upon 
the  distance  principle,  to  the  southern  states.  ^  A  thorough- 
going scientific  readjustment  was  proposed  The  situation  is 
significantly  described  in  the  following  extract  from  this 
report : 

"Your  committee  entered  upon  the  performance  of  their  duty 
entertaining  the  sentiment  that  experience  and  observation  have 
rendered  generally  potent  among  those  in  charge  of  the  revenue  interest 
of  transportation  lines,  namely,  the  necessity  for  more  intelligent  and 
defensible  methods  of  making  competitive  freight  rates  than  the 
following  of  figures,  descending  to  us  from  tariffs  named  on  arbitrary 
bases  or  conditions  now  obsolete,  or  by  the  assumption  of  differences 
between  centres  of  trade  now  changed  or  junction  points  now  no  longer 
such,  or  other  methods  for  which  there  are  no  reasons  capable  of 
satisfactory  explanation." 

Representatives  of  most  of  the  important  lines  subscribed  to 
this  plan;  but  it  fell  through  at  the  last  because  of  the  oppo- 
sition of  others,  selfishly  viewing  their  own  particular  interests 
rather  than  the  general  welfare  of  all.  It  is  clear  that  while 
minor  improvements  may  be  introduced,  no  widespread  reform 
can  be  effected  without  the  interposition  of  Federal  authority. 
It  is  to  be  hoped  that  this  exercise  of  authority  under  the 
larger  powers  now  conferred  by  Congress  since  1906  may  not 
long  be  ■\vithheld. 

A  third  and  essentially  different  problem  respecting  southern 
rates  concerns  the  discrimination  against  western  cities  in  favor 
of  those  along  the  Atlantic  seaboard.  This  has  been  for  years 
before  the  Interstate  Commerce  Commission  in  the  Cincin- 
nati and  Chicago  Freight  Bureau  cases.^    The  amount  of  this 

1  Southern  Railway  and  Steamship  Association  Proceedings;  Meeting 
of  Aug.  12,  1880. 

2  Fully  discussed  at  pp.  248  supra  and  588  infra. 


392  RAILROADS 

discrimination  appears  in  the  fact  that  at  the  time  of  the 
original  complaint,  the  rate  from  Cincinnati  to  Atlanta  was 
ninety-four  per  cent,  of  the  rate  from  New  York  to  the  same 
point;  although  the  distance  from  Cincinnati  was  scarcely- 
more  than  half  of  that  from  New  York.  It  appears  as  if 
this  difference  were  largely  the  result  of  keen  water  com- 
petition by  coastwise  steamers,  —  a  competition  which 
affects  rates  for  a  considerable  distance  inland  all  along  the 
coast  as  far  as  New  Orleans.  Where  such  water  competition 
is  absent,  there  seems  to  be  a  general  arrangement  as  between 
East  and  West  which  is  standardized  by  distance.  Atlanta 
gives  the  keynote;  and  all  rates  from  outside  southern  territory 
change  with  its  fluctuations.  The  disability  against  western 
cities  may  be  expressed,  therefore,  in  another  way,  by  the 
fact  that  New  York,  although  so  much  farther  north  than 
Baltimore,  —  supposed  theoretically  to  be  kept  on  a  par  with 
Louisville  as  to  rates,  —  reaches  Atlanta  on  lower  charges 
than  are  made  to  Cincinnati. 

Fortunately  an  attempt  at  improvement  of  the  southern 
rate  system  will  be  greatly  aided  by  the  wonderful  industrial 
revival  which  has  been  under  way  during  the  last  decade.  The 
growth  of  population,  and  especially  the  development  of  manu- 
factures, may  render  it  possible  for  the  carriers  to  endure  the 
hardship  which  any  traffic  readjustment  always  entails.  The 
growth  of  manufactures,  measuring  in  a  way  the  degree  to 
which  the  South  is  learning  to  supply  its  own  needs,  appears 
in  the  fact  that  in  1907  it  converted  one-fifth  of  its  cotton 
production  into  cloth,  and  reduced  from  its  own  ores  one-half 
of  its  consumption  of  pig  iron  in  its  own  local  factories.  Furni- 
ture shipments  to  the  South  were  once  large.  At  the  present 
time  High  Point,  North  Carolina,  is  second  only  to  Grand  Rap- 
ids in  this  line  of  manufacture.  Every  new  mill  and  mercantile 
establishment  which  springs  up,  is  bound  to  help  to  a  degree 
in  the  transition  from  a  mediaeval  scheme  of  rate  making  to  a 
more  defensible  system. 


THE  BASING  POINT  SYSTEM  393 

The  Texas  "common  point"  system  affords  a  valuable 
illustration  of  the  influence  of  competitive  forces  in  trade  in 
bringing  about  an  equalization  of  transportation  charges  over 
a  wide  area.^  It  also  shows  the  danger  of  localization  of  interest 
through  the  exercise  of  piece-meal  control  by  state  commissions 
rather  than  the  enforcement  of  broad-gauge  regulation  by  the 
Federal  government.  The  settlement  of  the  great  area  of 
Texas  naturally  first  took  place  by  extension  inland  from  the 
Gulf  coast.  All  supplies  came  by  sea  from  the  north.  Freight 
schedules  were  scaled  from  the  seaboard  according  to  distance, 
more  or  less,  in  competition  with  stage  and  wagon.  Gradually, 
however,  with  the  growth  of  St.  Louis  as  a  rival  centre  of  dis- 
tribution, railroads  serving  that  city  penetrated  directly  from 
the  northeast.  The  St.  Louis  jobbers  were  at  once  brought 
into  keen  rivalry  with  merchants  in  North  Atlantic  states, 
served  by  coastwise  steamship  lines.  This  competition  begin- 
ning at  the  points  of  contact  of  the  two  different  sets  of  rail- 
roads, gradually  extended  all  over  the  state.  St.  Louis  lines, 
acting  for  local  jobbers  whose  goods  came  from  New  York, 
might  not  charge  more  at  any  point  in  the  aggregate  than  the 
total  rate  from  the  same  initial  city  which  applied  by  way  of  the 
Gulf  steamers.  Nor  could  the  railroads  in  from  the  Gulf  ask 
more  for  both  steamer  and  rail  carriage  than  the  entire  double 
charge  from  New  York  around  by  way  of  St.  Louis.  The 
natural  stronghold  of  the  Gulf  lines'  was  in  the  centre  and  the 
south;  northern  Texas  was  more  naturally  tributary  to  St. 
Louis;  but  gradually  a  compromise  was  effected  whereby 
equality  of  rates  was  accorded  either  from  New  York  or  St. 
Louis  to  all  stations  throughout  the  state.  Thus  arose  the 
so-called  Texas  Common  Point  Territory,  to  all  parts  of  which 
Kansas  City,  Chicago,  and  finally  all  other  distant  cities  were 
admitted  on  even  terms. 

Another  feature  of  the  Texas  rate  adjustment  is  suggestive. 

1  McPherson,  Railroad  Freight  Rates,  p.  92,  is  best  on  this.  Cf.  pp. 
127  and  243,  sujpra. 


394  RAILROADS 

A  vast  territory,  uniform  in  products  and  needs,  might  either 
be  served  by  a  few  great  distributing  centres  or  by  a  larger 
number  of  smaller  ones,  each  forming  the  natural  focus  of 
trade  within  a  given  district.  Believing  the  latter  arrangement 
to  be  better  suited  to  local  conditions,  the  Texas  Railway 
Commission  has  arbitrarily  prescribed  such  intra-state  tariffs 
as  to  foster  the  development  of  a  number  of  such  jobbing  points 
or  mercantile  centres.  Local  rates,  more  or  less  proportioned 
according  to  distance,  are  graded  up  to  a  maximum,  all  based 
principally  upon  the  needs  of  the  principal  city,  Houston,  as 
served  by  its  seaport,  Galveston.  The  significant  feature  of 
these  Texas  local  rates,  however,  is  the  fact  that  beyond  a  fixed 
maximum,  —  say  245  miles  on  classified  tonnage,  or  160  miles  on 
cotton,  —  no  further  increase  of  rate  occurs  with  extension  of 
the  haul.  That  is  to  say,  beyond  a  certain  radius  fixed  by  the 
maximum  rate,  distributing  centres  are  placed  upon  an  entire 
parity  with  one  another.  Fort  Worth,  for  example,  within  a 
distance  of  about  two  hundred  miles,  naturally  has  an  advantage 
over  all  other  competing  centres,  more  distantly  located;  but 
outside  of  this  zone,  naturally  tributary  to  it  as  a  provincial 
trade  centre,  all  others  such  as  Dallas,  Waco,  or  San  Antonio  en- 
joy equal  opportunity.  In  only  one  respect  is  the  distance  prin- 
ciple violated :  namely,  in  the  preferential  rates  from  the  north 
to  Houston  and  Galveston  as  compared  with  the  higher  charges 
to  intermediate  Texas  points.  These  primary  centres  are 
encouraged  by  standing  in  a  class  by  themselves. 

This  theoretically  admirable  Texas  system  is,  however, 
unstable  in  several  regards.  It  is  artificial  in  that  it  is  primarily 
adjusted  to  the  needs  of  the  state,  without  reference  to  the 
rights  of  other  places  Ijang  beyond  its  borders.^  The  railroads 
naturally  desire  to  contract  the  common  point  territory;  the 
forces  of  trade  rivalry  seek  to  enlarge  it.  The  growth  of  middle 
western  cities  and  manufactures,  supplying  Texas  from  their 
own  domestic  plants  rather  than  merely  redistributing  goods 
1  Cy.  chap.  XX  on  the  conflict  of  state  and  Federal  powers. 


TRANSCOXTIXEXTAL  RATES  395 

manufactured  in  the  East,  also  tends  to  modify  the  scheme. 
"WTiether  the  common  point  system,  therefore,  can  long  \nth- 
stand  the  force  of  these  disintegrating  influences  remains  to  be 
seen.  The  conditions  are  not  compact  and  homogeneous  as 
they  are  in  New  England,  which  enjoys  a  similar  flat  rate 
system.  And  it  may  well  be  that  ambitious  cities  along  the 
northwestern  border  of  the  state,  like  Fort  Worth,  may  finally 
succeed  in  forcing  concessions  in  rates  from  the  Middle  West 
on  the  ground  of  their  relative  nearness  as  compared  with 
competitors  further  south.  On  the  other  hand,  distributing 
centres  farthest  away  from  the  main  sources  of  supply,  like 
San  Antonio,  would  naturally  resist  any  infraction  of  the  rule 
of  parity.  And  then,  again,  it  is  becoming  apparent  that  the 
decentralization  of  distribution  through  a  number  of  second- 
rate  jobbing  towTis  rather  than  from  one  preeminent  centre, 
is  hindering  the  growth  of  a  metropohs,  able  to  compete  on  even 
terms  in  high  grade  products  wdth  the  older  centres  of  the  East. 
Few  dealers  in  Texas  cities  are  able  to  purchase  djy  goods  or 
boots  and  shoes  in  carload  lots,  that  is  to  say,  on  the  lowest 
terms  as  concerns  freight  rates;  and  the  combination  of  ship- 
ments of  different  goods  to  make  up  a  miscellaneous  carload 
rate,  thus  overcoming  this  disadvantage,  is  open  to  serious 
objection.^  All  told,  therefore,  the  experience  of  Texas  is  well 
worth  attentive  consideration,  as  a  study  in  the  intimate 
relationship  between  trade  and  transportation.  The  sharpness 
of  contrast  between  such  a  common  point  scheme  and  the 
basing  point  system  of  the  other  southern  states,  brings  the 
relative  advantages  and  defects  of    each  into  strong    relief. 

Transcontinental  freight  rates  have  been  brought  into 
prominence  of  late  in  direct  connection  with  the  wonderful 
growth  of  population  and  trade  on  the  Pacific  slope.  ^     Our 

'  Cf.  chap.  IX  on  carload  rates  as  a  problem  in  classification. 

2  This  problem  is  discussed  as  a  form  of  local  discrimination  at  p.  245, 
chap.  VII,  supra,  and  as  a  long  and  short  haul  question  at  p.  610,  chap. 
XIX,   infra.     The   voluminous   record   in   the    pending    Union   Pacific- 


396  RAILROADS 

territorial  possessions  in  the  Pacific  and  the  development  of 
Oriental  trade,  together  with  the  general  interest  in  the  Panama 
Canal  since  1900,  have  all  conspired  to  direct  attention  to  this 
complicated  problem.  The  first  point  to  notice  is  the  relatively- 
high  level  of  rates,  averaging  very  much  more  per  mile  than 
anywhere  else  in  the  United  States.  The  following  table  of 
rates  in  1905  is  significant: 


Miles 

Class 

From 

1 

5 

912 
Q19 

f^lViipnom  t,n  Nptur  York         

$0.75 
1.10 
3.00 

$0.30 

Chicago  to  New  Orleans    

0.47 

9*^98 

Chicago  to  San  Francisco    

1.65 

These  distance  tariffs,  however,  as  already  explained  in  our 
chapter  on  Classification,  need  to  be  supplemented  by  addi- 
tional details  in  order  to  bring  into  relief  the  relative  amount 
of  the  charge.  So  far  as  these  figures  go,  it  will  be  observed 
that  for  a  distance  about  two  and  one-half  times  as  great  as 
from  Chicago  to  New  York  or  the  Gulf  of  Mexico,  the  rates  to 
San  Francisco  are  very  much  higher  in  proportion. 

The  unrest  among  shippers  in  far  western  territory  is  not 
due  to  the  relatively  high  tariffs  in  force.  It  arises  primarily 
from  the  nullification  of  the  distance  principle  in  rates.  And, 
in  the  second  place,  it  hinges  upon  the  relation  between  car- 
load ratings  and  the  development  of  local  jobbing  business. 
The  primary  factor  in  the  making  of  rates  to  the  coast  has 
always  been  the  existence  of  water  competition,  either  by  way 
of  Cape  Horn  or  the  Isthmus  of  Panama. ^  The  facilities  for 
cheap  transportation  over  these  routes  have  compelled  the 

Southern  Pacific  Merger  case  before  the  XT.  S.  Supreme  Court,  No.  820, 
Octol)or  term,  1911,  is  a  primary  source  of  material.  It  is  outlined  and 
examined  in  detail  in  our  Railway  Problems,  rev.  ed.,  chap.  XXII. 

1  Best  described  in  19  I.C.C.  Rep.,  p.  245;  and  21  Idem,  pp.  345-354, 
416-421. 


TRANSCONTINENTAL  RATES  397 

all-rail  lines  to  make  low  through  rates  which  would  enable 
them  to  secure  a  portion  of  the  business.  Inasmuch,  also,  as 
most  of  the  competition  of  the  steamships  over  these  very  long 
routes  involves  shipments  in  large  quantity,  competition  with 
the  railroads  has  mainly  been  felt  in  making  rates  by  the  car- 
load. The  result  has  been  the  existence  for  many  years  of  a 
special  transcontinental  tariff,  more  or  less  uniformly  adopted 
by  all  the  roads,  which  consists  in  the  main  of  commodity  rates 
for  carload  shipments,  the  scale  of  these  rates  being  sufficiently 
low  to  meet  steamship  competition  as  above  described. 

This  simple  situation  has  been  comphcated  by  the  fact  that 
all  of  the  transcontinental  lines,  except  the  Southern  Pacific 
with  its  eastern  terminus  at  New  Orleans,  have  had  a  particular 
interest  in  building  up  both  manufacturing  and  jobbing  business 
at  their  eastern  terminals  at  Chicago  or  Missouri  river  points. 
For  such  a  policy  enabled  them  to  secure  the  entire  charge  for 
the  transportation  of  commodities  to  the  Pacific  coast,  without 
the  necessity  of  a  pro-rating  division,  as  when  goods  are  hauled 
from  the  Atlantic  seaboard  cities.  The  situation  then  resolved 
itself  practically  into  a  competition  of  markefs.  Chicago, 
St.  Louis,  and  St.  Paul  were  pitted  against  New  York,  Phila- 
delphia, and  other  Atlantic  ports  in  rivalry  for  the  trade  of  the 
Pacific  coast.  In  order  to  benefit  the  cities  in  which  they  had 
a  peculiar  interest,  the  all-rail  lines,  therefore,  gradually  intro- 
duced what  is  known  as  the  system  of  ''postage-stamp  rates."  ^ 
That  is  to  say,  they  gradually  extended  to  one  city  after  another 
east  of  the  Mississippi  river,  the  same  rates  to  the  Pacific  coast 
as  were  enjoyed  by  the  seaboard  cities.  As  a  consequence,  for 
some  years  every  city  east  of  the  Mississippi  has  been  able  to 
ship  goods  to  San  Francisco  at  the  same  rate  which  is  paid  from 
Boston  and  New  York,  which  may  be  more  than  a  thousand 
miles  farther  away. 

1  Historically  discussed  in  9  Int.  Com.  Rep.,  p.  318  and  19  I.C.C.  Rep., 
p.  238  with  map;  both  reprinted  in  our  Railway  Problems;  and  21  Idem, 
pp.  352  and  418. 


398  RAILROADS 

This  system  is  justified  in  theory,  even  for  rates  from  Chicago 
and  St.  Louis,  as  due  to  water  competition;  and  it  has  been 
said  that  commodities  are  sometimes  shipped  from  as  far 
inland  as  this  to  the  Atlantic  seaboard,  and  thence  to  San 
Francisco  by  water.  The  latest  phase  of  the  controversy 
reveals  the  weakness  of  this  argument.  The  inland  cities,  such 
as  Chicago  and  St.  Louis,  having  been  accorded  the  same  rate 
to  San  Francisco  as  New  York  and  Philadelphia,  demand  lower 
rates  than  the  Atlantic  cities  in  proportion  to  their  relative 
nearness  to  San  Francisco.  In  other  words,  they  demand  that 
the  rates,  instead  of  being  made  upon  the  "postage-stamp  basis" 
—  absolutely  the  same  from  all  cities,  however  remote  —  shall 
be  graded.  This  would  give  Chicago,  St.  Louis,  and  St.  Paul 
an  advantage  in  laying  down  manufactures  or  in  distributing 
products  secondarily,  in  competition  with  the  older  centres  at 
the  East.  To  this  policy  the  jobbing  interests  of  the  Pacific 
coast  strenuously  object.  From  their  point  of  view,  any  grad- 
ing of  rates  will  enable  the  western  cities  to  compete  with  them 
directly  in  local  distributive  business.  They  do  not  object  to 
the  low  rates  from  the  eastern  seaboard,  nor  would  it  avail  to 
do  so  because  the  natural  conditions  of  water  competition  are 
beyond  control.  Moreover,  the  low  rates  from  Atlantic  points 
are  all,  as  above  said,  on  carload  lots,  and  such  low  carload  rates 
operate  distinctly  to  the  advantage  of  the  Pacific  coast  jobber, 
enabling  him  to  obtain  goods  in  wholesale  lots,  and  then  to 
break  bulk  in  order  to  distribute  them  up  and  down  the  coast. 

The  intimate  relationship  between  the  carload  question 
and  the  grading  of  rates  to  interior  centres,  is  plain  from  the 
foregoing  paragraph.  Viewed  by  itself  alone,  the  carload  ques- 
tion is  not  dissimilar  to  that  presented  in  the  southern  states. 
Rivalry  between  jobbers  in  the  East  and  provincial  middlemen 
in  a  little  developed  territory  is  in  evidence  in  either  case.  The 
St.  Louis  Business  Men's  League  case  best  exemplifies  this  issue.  ^ 

'  9  Int.  Com.  Rep.,  p.  318;  reprinted  in  our  Railway  Problems,  chap. 
XVII. 


TRANSCONTINENTAL  RATES  399 

Trade  interests  in  this  interior  city  wished  to  abolish  all 
distinction  between  carload  and  less-than-carload  lots,  for 
the  patent  purpose  of  enabling  them  to  sell  direct  through- 
out the  Pacific  coast  territory  in  competition  with  San  Fran- 
cisco jobbers.  The  latter,  on  the  other  hand,  demanded 
that  all  less-than-carload  ratings  should  be  abolished  on 
transcontinental  shipments;  so  that  they  might  purchase 
their  goods  by  the  carload  and  resell  them  in  parcels.  The 
Commission,  after  fully  weighing  the  evidence,  decided  that, 
so  far  as  carload  differentials  were  concerned,  the  existing 
scheme  in  1902  was  not  abnormal  as  compared  with  other 
portions  of  the  country.  On  the  other  aspects  of  the  matter, 
such  as  the  relativity  of  rates  to  Rocky  mountain  and  Pacific 
terminal  points,  no  ruling  was  made.  But  the  dissenting 
opinion  upon  this  point  is  significant,  as  we  shall  see,  in  that  it 
put  forth  the  suggestion  of  a  scheme  of  rates  graded  according 
to  distance,  —  a  plan  ten  years  later  to  be  enforced  by  the 
Commission  under  its  amplified  powers  at  law. 

The  welfare  of  the  entire  Rocky  mountain  belt  of  popula- 
tion, and  particularly  its  commercial  centres,  constitutes  a 
second  phase  of  the  problem  of  transcontinental  rates. ^  The 
whole  chain  of  cities  from  Spokane  on  the  north  to  the  Mexican 
border  has  been  long  and  vitally  interested  in  this  matter. 
Rates  to  these  cities,  elsewhere  described,-  as  well  as  from  these 
cities  out  in  either  direction,  are  very  much  higher  than  the 
rates  for  longer  distances  through  them  and  beyond.  Thus, 
for  instance,  in  the  case  of  Pueblo,  it  has  been  shown  that  bar 
iron  was  hauled  2,400  miles  from  Chicago  to  San  Francisco,  for 
fifty  cents  per  one  hundred  pounds,  and  rails  were  hauled  the 

1  19  I.C.C.  Rep.,  p.  238  with  map,  reprinted  in  our  Railway  Problems, 
voicing  the  complaint  of  the  Nevada  Railroad  Commission,  is  thoroughly- 
typical.  The  leading  Kindel  cases  are  in  8  I.C.C.  Rep.,  p.  608;  9  Idem, 
p.  606  and  11  Idem,  p.  495  (with  a  highly  suggestive  map);  the  San 
Bernardino  cases  are  in  A  Idem,  p.  104;  and  9  Idem,  p.  42;  and  for  Salt 
Lake  City,  19  Idem,  p.  218.  Cf.  also  University  of  Colorado,  Economic 
Studies,  Dec.  1909.  ^  Page  610  iiifra. 


400  RAILROADS 

same  distance  for  sixty  cents;  while  for  the  haul  from  Pueblo, 
Colorado,  to  San  Francisco,  only  1,500  miles,  the  rate  on  both 
commodities  was  $1.60.  Cotton  piece  goods  were  shipped 
from  Boston  to  Omaha  for  fifty-two  cents  per  one  hundred 
pounds,  with  the  added  rate  on  to  Denver  of  $1.25,  giving  an 
aggregate  of  $1.77.  In  face  of  this,  the  rate  through  Denver 
to  California  is  only  one  dollar.  The  railways'  defence  for  this 
situation  was  that  the  low  through  rates  were  compelled  by 
water  competition.  But  it  is  certainly  difficult  on  this  ground  to 
justify  lower  rates  to  Missouri  river  points  than  to  Denver  or 
Salt  Lake  City.  In  other  words,  as  urged  in  our  chapter  on 
local  discrimination/  having  once  recognized  the  principle  of 
blanket  rates  as  far  west  as  Kansas  City,  there  seemed  to  be 
no  reason  why  the  limit  should  not  be  pushed  further  west. 
All  of  these  allied  cases,  however,  were  left  unsettled  for  years, 
owing  to  the  lack  of  power  on  the  part  of  the  Interstate  Com- 
merce Commission  to  enforce  its  decisions  under  the  law  as 
then  interpreted.  With  the  new  legislation  since  1906,  as  will 
be  shown,^  a  permanent  and  just  solution  of  the  matter  is 
promised  at  last. 

The  relations  between  the  Canadian  railways  and  the  trans- 
continental lines  in  the  United  States  were  for  many  years 
unsatisfactory;  and  were  oftentimes  a  source  of  serious  dis- 
turbance in  the  matter  of  rates.  The  Canadian  Pacific  claimed, 
and  was  in  fact  accorded  for  some  years,  a  differential  or  a  lower 
rate,  in  order  to  offset  its  disability  in  the  matter  of  distance, 
extra-territoriality,  etc.  Thus,  for  instance,  in  1888  the  Canad- 
ian Pacific  was  allowed  to  quote  rates  thirty  cents  per  one  hun- 
dred pounds  below  those  by  the  standard  lines.  The  rates 
were  afterwards  increased  on  first-class  traffic.  The  other  roads 
refused,  after  a  time,  to  continue  differentials  at  this  figure,  and 
after  a  year  the  differential  was  reduced  to  twenty-eight  cents 
from  the  Atlantic  seaboard.  The  question  was  bitterly  con- 
tested after  that  until  1892,  when  all  agreements  were  aban- 
'  Page  342,  supra.  *  Chapter  XIX,  iyifra. 


SPECIAL  RATE  PROBLEMS  401 

doned.  Since  that  time  the  Canadian  Pacific  has  acted 
independently,  taking,  as  a  rule,  rates  about  ten  per  cent,  less 
than  its  competitors  in  American  territory.  The  whole  question 
was  submitted  to  arbitration  in  1898,  and  by  a  divided  opinion 
two  out  of  three  of  the  arbitrators  decided  that  the  Canadian 
Pacific  Railway  was  not,  nor  should  it  be,  entitled  to  a  differ- 
ential under  the.  rates  made  by  the  United  States  lines. ^  The 
intricacy  of  the  question  is  indicated  by  the  non-concurrence  in 
this  conclusion  of  so  well  recognized  an  authority  as  J.  W, 
Midgley.  The  railroads  concerned  having  all  agreed  to  ac- 
quiesce in  this  decision,  the  situation  has  been  far  more 
harmonious  in  this  respect  than  for  many  years  previous. 

A  difficulty  often  arises  in  connection  with  the  interruption 
of  a  shipment  of  goods  in  order  to  subject  it  to  some  simple 
process  of  manufacture.  Shall  the  entire  journey  from  pro- 
ducer to  consumer  be  considered  as  a  unit  in  determination  of 
the  rate;  or  shall  the  two  parts,  before  and  after  the  change  of 
form  by  manufacture,  be  considered  as  separate  and  distinct 
in  this  regard?  This  problem  arises  in  connection  with  the 
so-called  "milling-in-transit"  system  for  grain.^  Logs  like-v\ase 
may  be  stopped  at  some  convenient  point  en  route  for  cutting 
into  lumber.^  Cattle  or  hogs  must  sometimes  be  stopped  on 
the  way  to  market  in  order  to  fatten  or  otherwise  prepare  them 
for  sale;  **  structural  iron  may  be  halted  for  the  purpose  of 
fitting,  shearing,  or  punching;  °  transit  privileges  on  wool  or 
concentration  points  for  other  commodities  may  be  involved;^ 
or  other  goods  may  be  substituted  at  an  intermediate  point  .'^ 
And  then,  finally,  there  are  the  so-called  "floating  cotton" 

^  Board  of  Arbitration  on  Question  of  Canadian  Pacific  Differentials 
Proceedings  and  Decision,  Oct.  12,  1898. 

2  Typical  cases  8  Int.  Com.  Rep.,  p.  47;  and  10  I.C.C.  Rep.,  p.  675. 

3  The  Central  Yellow  Pine  case,  No.  681,  1903;  and  Op.  705,  1906. 
Also  in  1912,  22  I.C.C.  Rep.,  p.  239. 

^  Best  described  by  Bowes,  Senate  ■  (Elkins)  Committee,  1905,  p.  2851. 
5 14  I.C.C.  Rep.,  11. 

6  23  I.C.C.  Rep.,  169  and  438.        ^  ig  Idem,  p.  280;  cf.  p.  209,  supra. 
VOL.  I — ^26 


402  RAILROADS 

cases. ^  The  principle  at  bottom  is  practically  the  same  in  all 
of  these  sets  of  cases.  It  may  be  worth  while  briefly  to  con- 
sider two  of  them. 

The  "milling  in  transit"  system  is  simply  that  of  according 
to  grain  which  is  unloaded  and  milled  at  an  intermediate  point, 
the  low  through  rate  from  the  point  of  origin  to  that  of  con- 
sumption. Thus,  for  instance,  wheat  grown  in  North  Dakota 
may  be  unloaded  and  ground  into  flour  at  Minneapolis  and 
thence  shipped  to  New  York  at  the  through  rate  from  its  point 
of  origin  to  New  York.  Oftentimes  a  very  small  charge,  as, 
for  instance,  one  cent  per  one  hundred  pounds,  is  made  for  the 
privilege.  This  system  prevails  throughout  the  southern  states 
also.  Grain  is  brought,  for  instance,  from  Kansas  City  to 
Nashville  or  Birmingham,  milled  there,  and  shipped  farther 
south  for  consumption.  The  rate  charged  is  based  upon  the 
entire  haul  from  Kansas  City  to  the  local  point  where  the  flour 
is  consumed.  Obviously  this  system  stimulates  very  greatly 
the  development  of  the  milhng  industry  at  intermediate  points. 
It  is  opposed  correspondingly  by  the  large  cities  which  other- 
wise enjoy  special  privileges  in  the  matter  of  low  rates. 

Precisely  the  same  principle  is  involved  in  what  are  kno-wn 
as  "floating  cotton"  rates.  In  this  case  the  system  has  devel- 
oped of  permitting  cotton  to  be  unloaded  in  transit  and  com- 
pressed at  an  intermediate  point,  it  being  thereafter  reshipped 
to  the  point  of  destination  at  a  through  rate  from  its  point  of 
origin.  Thus,  for  example,  cotton  may  be  hauled  twenty  to 
thirty  miles  to  one  of  the  larger  towns.  There  it  is  unloaded, 
sorted  and  compressed,  reloaded,  and  sent  on  as  if  it  had  not 
been  interfered  with  at  all.  Obviously  one  rate  for  the  entire 
shipment  is  much  less  than  the  local  rate  into  the  to^\^^  — 
which  is  always  very  high  —  plus  a  second  rate  from  that  town 
on  to  destination.  The  system  in  respect  to  cotton  has  de- 
veloped even  further  than  that  of  milling  in  transit  of  grain; 
for  in  the  latter  case  the  grain  must  be  unloaded  at  some  point 
1  8  Int.  Com.  Rep.,  p.  121,  is  typical  of  a  large  number. 


SPECIAL  RATE  PROBLEMS  403 

on  the  line  to  destination;  whereas  in  the  case  of  cotton  it  may, 
under  rulings  of  the  Interstate  Commerce  Commission,  be 
actually  hauled  away  from  its  ultimate  destination  a  number 
of  miles  and  then  reshipped  back  over  the  same  line  though 
at  a  lower  rate  than  it  could  otherwise  have  enjoyed.  Thus, 
in  a  leading  case  decided  in  1899  it  was  held  by  the  Interstate 
Commerce  Commission  that  cotton  could  be  hauled  from 
Gattman,  Mississippi,  forty-one  miles  northwest  to  Tupelo, 
compressed  there,  and  then  hauled  back  again  through  Gatt- 
man and  Birmingham  to  New  Orleans. 

Important  centres,  such  as  Memphis,  which  formerly  en- 
joyed almost  a  monopoly  of  the  compressing  business,  have 
strenuously  opposed  the  development  of  this  system.  On  the 
other  hand,  it  offers  a  distinct  advantage  to  the  grower,  because 
in  place  of  selling  the  cotton  through  cotton  factors  at  Memphis 
or  other  centres,  it  may  be  sorted  and  compressed  at  local 
stations.  By  this  means  much  expense  in  the  matter  of  dray  age, 
handling  and  commissions  is  saved.  This  system  is  particularly 
advantageous  because  it  tends  to  break  up  the  pernicious 
basing  point  system,  which  tends  to  centraUze  all  business  at  a 
few  important  points  in  the  southern  states.  Almost  a  com- 
plete revolution  in  the  matter  of  handling  cotton  has  been 
effected  during  the  last  few  years  by  the  growth  of  this  practice. 
Not  only  has  the  floating  cotton  system  developed  further  than 
that  of  milling  in  transit  by  according  the  right  of  shipping 
even  backward,  away  from  the  ultimate  destination;  it  has 
also  permitted  of  liberality  in  the  handling  of  the  product  itself. 
It  has  been  held  that  it  is  not  even  necessary  for  the  same  cotton 
to  be  reshipped  from  the  point  of  compression.  A  carload 
started  from  the  initial  point  for  Boston,  for  example,  may 
never  reach  there,  other  cotton  being  substituted  for  it.  The 
destination  of  the  car  may  be,  and  frequently  is,  changed.  A 
few  dozen  grades  of  cotton  being  on  the  market,  the  original 
shipment  into  the  point  of  compression  may  be  entirely  re- 
sorted and  distributed  to  a  dozen  different  points.     Even  the 


404  RAILROADS 

ownership  of  the  cotton  may  change  while  it  is  in  transit. 
Nevertheless,  the  system  has  been  held  as  valid  under  the  law, 
and  its  beneficial  effects  during  the  last  few  years  have  been 
observable,  especially  in  the  southern  states.  Of  late  the  danger 
lurking  in  these  systems  of  gross  personal  favoritism,  have  led 
to  their  careful  examination  in  a  number  of  cases.  What  the 
final  policy  regarding  them  is  to  be,  cannot  at  this  writing  be 
affirmed.^ 

A  problem  of  considerable  difficulty,  involving  the  relative 
shares  of  the  various  seaports  in  American  export  business,  has 
occupied  the  attention  of  experts  for  more  than  a  generation; 
and  at  this  present  writing,  although  before  the  Interstate 
Commerce  Commission  for  the  third  time,  seems  to  be  almost 
as  far  from  a  satisfactory  solution  as  ever.^  It  originated  at 
the  time  of  the  rate  wars  in  1876.  The  first  agreement  between 
all  the  trunk  lines  concerning  it  was  entered  into  in  the  following 
year.  By  this  an  attempt  was  made  to  equalize  the  aggregate 
cost  of  ocean  and  rail  transportation  between  competing  points 
in  the  West  and  all  foreign  and  domestic  points  reached  through 
Baltimore,  Philadelphia,  New  York,  and  Boston.  Under  this 
agreement,  Baltimore  was  allowed  a  rate  of  three  cents  below 
the  rate  from  Chicago  to  New  York;  Philadelphia  enjoyed  a 
concession  of  two  cents;  while  Boston  had  its  rate  fixed  at  a 
certain  percentage  of  the  Chicago-New  York  figure.  There 
was  considerable  dissatisfaction  expressed  at  various  times 
with  these  differentials,  and  the  whole  matter  was  submitted 
to  arbitration  in  1882.     The  commercial  interests  of  New  York, 

1  23  I.C.C.  Rep.,  p.  448:  U.  S.  Commerce  Court,  April  session,  1912, 
No.  47.  Ann.  Rep.,  I.C.C,  1896,  p.  78.  Extensive  investigations  con- 
cluded July  6,  1912. 

"  The  literature  upon  this  subject,  aside  from  the  decisions  specifically 
noted  below,  is  voluminous.  The  Senate  (Elkins)  Committee,  1905,  vol. 
V,  devotes  much  attention  to  it  as  a  constitutional  difficulty  in  the  way  of 
amendment  of  the  law.  The  admirable  catalogue  prepared  by  the  Bureau 
of  Railway  Economics,  1912,  at  p.  126,  well  covers  the  field.  CJ.  chap. 
X,  p.  361,  supra. 


SPECIAL  RATE  PROBLEMS  405 

as  well  as  of  the  railroads  centering  in  that  cit}^,  have  complained 
bitterly  that  these  differences,  once  adjusted  upon  a  very  much 
higher  scale  of  rates  than  at  present,  have  become  increasingly 
burdensome  now  that  the  Chicago-New  York  rate  is  perhaps 
not  more  than  a  third  or  a  quarter  of  what  it  formerly  was, 
while  the  differential  has  remained  at  a  fixed  figure.  The 
recent  decline  of  the  export  commerce  of  New  York  is,  in  fact, 
ascribed  in  a  large  measure  to  the  operation  of  these  differen- 
tials ;  and  a  leading  case  before  the  Interstate  Commerce  Com- 
mission, instituted  by  the  Produce  Exchange  of  New  York, 
endeavored  to  secure  their  abolition.  The  Commission  held, 
however,  that  the  differentials  —  recognized  by  the  Joint 
Traffic  Association  of  1896  —  were  legitimately  based  upon 
competitive  relations  of  the  carriers;  and  that  consequently 
no  unlawful  preference  or  advantage  had  been  accorded  to  the 
cities  competing  with  New  York  for  export  business. 

The  result  of  pressure  for  a  larger  division  of  export  business, 
particularly  from  Boston,  led,  in  1899,  to  a  reduction  by  one- 
half  of  the  differentials.  The  matter  was  finally  submitted 
for  arbitration  to  the  Interstate  Commerce  Commission,  which 
very  fully  examined  the  question  and  rendered  a  decision  in 
1905.1  By  this  decision  rates  via  Philadelphia  on  traffic  for 
export  were  to  be  one  cent  less  than  by  way  of  New  York, 
while  to  Baltimore  they  were  to  be  two  cents  less.  This  ar- 
rangement still  left  Boston  subject  to  its  former  substantial 
disabihty.  It  was  contended  that  the  original  purpose  of  the 
differentials,  namely,  equilibration  of  rates  from  western  centres 
of  production  through  the  various  ports  to  Liverpool,  had  been 
practically  nullified.  For  a  time  the  phenomenal  development 
of  the  Gulf  exports  diverted  attention,  forcing  all  the  Atlantic 
seaports  to  make  common  cause  against  their  southern  rivals.^ 
But  the  passing  of  this  danger  once  more  revived  interest  in 
the  struggle  between  the  Atlantic  cities.  Opportunity  for  the 
collection  of  full  data  under  the  strengthened  Federal  law  in 
1  11  Int.  Com.  Rep.,  13.  ^  Page  31  with  diagram,  supra. 


406  RAILROADS 

1906,  made  it  possible  to  reopen  the  case  in  1912  before  the 
Interstate  Commerce  Commission.  But,  in  the  meantime, 
both  in  1909  and  1911,  after  an  interval  of  twenty  years,  trunk 
line  rate  wars  threatened  to  break  out  for  the  protection  of 
Boston  against  its  rivals.  The  latest  decision  by  the  Commis- 
sion, just  handed  down,i  still  fails  to  satisfy  Boston.  No  differ- 
ential rate  on  export  grain  on  the  ground  of  distance  as  against 
New  York  is  conceded;  but  those  already  in  effect  at  Phila- 
delphia and  Baltimore  are  sanctioned.  What  the  effect  will 
be,  remains  for  the  future  to  determine. 

The  principle  involved  in  the  so-called  import  and  export 
cases  ^  is  that  of  the  reasonableness  of  charging  lower  rates  on 
goods  originally  shipped  from  or  destined  to  domestic  points, 
than  are  charged  for  similar  goods,  over  the  same  lines  and  for 
the  same  distances,  when  brought  from  or  destined  to  foreign 
countries.  Thus,  for  instance,  in  the  case  of  cotton  cloth 
shipped  by  way  of  Pacific  ports  to  the  Orient,  the  practice  is 
not  uncommon  of  charging  a  less  rate  to  San  Francisco  for  the 
transportation  of  goods  ultimately  destined  for  export,  than  is 
charged  on  similar  goods  which  are  to  be  unloaded  for  con- 
sumption at  San  Francisco  or  other  California  points.  Or, 
reversing  the  case,  this  question  touches  the  reasonableness  of 
transporting  goods  from  New  York  to  Chicago  at  a  lower  rate, 
if  they  have  been  brought  in  from  Europe,  than  is  charged  for 
similar  service  in  the  case  of  goods  that  have  originated  at  or 
near  New  York.  Cases  of  this  description  have  become  in- 
creasingly frequent  during  the  last  twenty  years.  The  first  and 
most  important  one,  upon  which  both  the  Interstate  Commerce 

1  24  I.C.C.  Rep.,  p.  55. 

2  The  leading  references  are  as  follows:  4  I.C.C.  Rep.,  p.  450;  10  Idem, 
p.  55;  IZIdem,  p.  87;  Rep.  to  the  Senate  by  I.C.C,  Feb.  28,  1903;  Senate 
(Elkins)  Committee,  1905,  Digest,  App.  V.  The  leading  export  rate  case, 
8  I.C.C.  Rep.,  p.  214,  is  reprinted  in  our  Railway  Problems.  Johnson  and 
Huebner,  Railroad  Traffic  and  Rates,  vol.  I,  pp.  492-518.  In  this  instance 
I  have  reproduced  a  portion  of  my  report  prepared  for  the  U.  S.  Industrial 
Commission  in  1900. 


SPECIAL  RATE  PROBLEMS  407 

Commission  and  the  United  States  Supreme  Court  have  passed, 
originated  in  proceedings  before  the  Interstate  Commerce 
Commission,  brought  by  the  New  York  Board  of  Trade  of 
Transportation  against  the  Pennsylvania  and  other  railroad 
companies.  The  case  practically  raised  the  general  question 
whether,  in  the  carriage  of  goods  from  American  seaports, 
carriers  subject  to  the  act  could  lawfully  charge  less  for  the 
transportation  of  imported  than  of  domestic  traffic  of  like 
kind  to  the  same  destination.  The  Commission,  after  careful 
examination,  held  that  such  differences  in  rates  constituted 
discrimination  as  against  the  domestic  shipper.  According  to 
its  view,  the  circumstances  and  conditions  pertaining  to  the 
carriage  of  freight  from  a  foreign  port  to  the  United  States 
could  not  be  considered  as  creating  the  dissimilarity  of  condi- 
tions which  alone  would  justify  a  different  rate  for  like  service 
in  the  two  cases.     The  Commission  held  that: 

One  paramount  purpose  of  the  act  to  regulate  commerce,  mani- 
fest in  all  its  conditions,  is  to  give  to  all  dealers  and  shippers  the  same 
rates  for  similar  services  rendered  by  the  carrier  in  transporting 
similar  freight  over  its  line.  Now,  it  is  apparent  from  the  evidence 
in  this  case  that  many  American  manufacturers,  dealers,  and  localities, 
in  almost  every  line  of  manufacture  and  business,  are  the  competitors 
of  foreign  manufacturers,  dealers,  and  localities  for  supplying  the 
wants  of  American  consumers  at  interior  places  in  the  United  States, 
and  that  under  domestic  bills  of  lading  they  seek  to  require  from  Ameri- 
can carriers  like  service  as  their  foreign  competitors.  .  .  .  The  act 
to  regulate  commerce  secures  them  this  right.  To  deprive  them  of 
it  by  any  course  of  transportation  business  or  device  is  to  violate  the 
statute." 

The  Commission  thereupon  ordered  the  carriers  to  cease 
and  desist  from  making  such  discrimination.  This  order,  while 
obeyed  by  a  number  of  carriers,  was  disregarded  by  the  Texas 
and  Pacific  Railway,  which  operated  an  import  line  from  New 
Orleans  to  San  Francisco.  Upon  application  by  the  Commis- 
sion this  case  was  carried  to  the  Supreme  Court  of  the  United 
States  for  final   adjudication.     The   Supreme   Court   decided 


408  RAILROADS 

that  the  interpretation  of  the  law  by  the  Commission  was 
defective,  although  three  members  of  the  court,  including  the 
Chief  Justice,  dissented  from  this  opinion.  As  an  illustration 
of  the  discrimination  which  existed  in  this  case  it  appeared  that 
the  domestic  rate  on  books,  buttons,  carpets,  etc.,  from  New 
Orleans  to  San  Francisco  was  $2.88  per  one  hundred  pounds, 
while  the  total  through  charge  on  the  same  articles  from  Liver- 
pool to  San  Francisco  was  only  $1.07.  The  Supreme  Court 
distinctly  refrained  from  an  opinion  as  to  the  reasonableness  of 
these  rates,  and  contented  itself  with  passing  upon  the  pro- 
priety of  any  difference  in  rates  whatever.  It  held  that  the 
contention  of  the  railroads  was  sound,  namely,  that  all  cir- 
cumstances and  conditions,  whether  within  the  United  States 
or  having  regard  for  ocean  rates  and  foreign  competitive  con- 
ditions, must  be  considered.  In  other  words,  they  recognized 
the  validity  of  the  claim  of  the  railroads  that  this  import  traffic 
must  be  taken  at  an  extremely  low  rate  if  at  all,  since  otherwise 
the  goods  would  go  by  water  around  Cape  Horn,  or  by  another 
route.  On  the  basis  of  such  reasoning  it  would  appear  that 
any  contribution  from  low  import  rates  to  the  fixed  charges  of 
the  railroad  would  enable  that  road  to  transport  its  domestic 
traffic  at  a  lower  rate  than  it  otherwise  might.  What,  however, 
the  majority  of  the  court  did  not  add,  although  it  was  developed 
by  the  dissenting  justices,  was  the  fact  that  these  conditions 
might  exclude  domestic  purchasers  entirely  from  certain 
markets,  giving  them  over  to  importers  who  could  control  the 
market  by  reason  of  the  low  rates  accorded.  Since  this  decision 
in  1896  the  railroads  have  still  further  developed  this  system  of 
discrimination.  The  only  safeguard  for  the  domestic  producer 
must  lie,  obviously,  in  some  decision  by  a  competent  tribunal 
as  to  the  amount  of  such  differences  which  may  reasonably 
exist.  The  Supreme  Court  has  upheld  their  validity  as  a  sys- 
tem, but  it  still  remains  for  the  amount  of  such  difference  which 
may  be  deemed  reasonable,  to  be  determined. 

Identical    in    principle    with    the    above    described     case, 


SPECIAL  RATE  PROBLEMS  409 

although  presenting  reversed  conditions,  are  the  so-called 
export  rate  cases.  These  have  to  do  mainly  with  the  rates 
charged  on  products  for  domestic  consumption  as  against  like 
products  for  export.  As  an  illustration  of  the  extent  of  such 
differences,  it  was  clearly  sho"WTi  before  the  Industrial  Com- 
mission that  at  times  the  freight  rate  on  wheat  from  Kansas 
City  to  Galveston  was  twenty-seven  cents  per  one  hundred 
pounds  if  for  domestic  consumption,  while  the  proportion  of 
an  export  rate  for  a  similar  ser\'ice  was  ten  cents.  ^  The  rate 
on  wheat  from  the  Mississippi  river  to  New  York  for  domestic 
consumption  was  at  times  twenty  or  twenty-one  cents  per 
one  hundred  pounds,  while  for  the  same  ser\'ice  when  the  goods 
were  to  be  exported,  the  rate  would  be  thirteen  cents  per  one 
hundred  pounds.  This  system  of  stimulating  foreign  business 
by  discriminatingly  low  rates  seems  to  have  attained  large 
proportions  only  since  1897.  The  Interstate  Commerce  Com- 
mission took  cognizance  of  the  system  in  a  decision  rendered 
in  1899.2  It  was  enabled  to  do  so  by  \drtue  of  the  Import 
Rate  decision  above  cited,  whereby  the  United  States  Supreme 
Court  authorized  it  to  consider  not  only  circumstances  and 
conditions  within  the  United  States,  but  also  those  relating 
to  ocean  transport  and  foreign  competition. 

The  railroads  justify  their  action  on  the  ground  that  only 
by  making  such  concessions  in  export  rates  could  they  lay  downi 
grain  in  foreign  markets  in  competition  with  other  parts  of  the 
world.  On  the  other  hand,  it  was  not  made  clear  why  such 
competition  from  foreign  markets  had  become  any  more  acute 
in  the  last  few  years  than  prior  to  that  time.  There  appears 
to  be  much  force  in  the  argument  of  many  shippers,  and  also 
of  some  railroad  men,  that  this  anomalous  condition  of  rates 
was  due,  not  so  much  to  the  keenness  of  foreign  competition, 
as  to  the  rivalry  among  the  American  carriers  themselves.     In 

1  Cf.  Ann.  Rep.,  I.C.C,  1899,  p.  22. 

-  S  Int.  Com.  Rep.,  p.  214;  reprinted  in  our  Railway  Problems,  chap. 
XVIII. 


410  RAILROADS 

other  words,  it  was  said  that  the  competition  between  the  Gulf 
ports  and  the  Atlantic  ports  was  responsible  for  the  abnormally 
low  rates  on  export  business.  In  line  vnth  this  argument  would 
seem  to  be  the  fact  that  it  is  the  rates  upon  wheat  and  not 
upon  flour  for  export,  which  have  decreased  more  than  in 
proportion  to  the  decrease  upon  similar  commodities  for 
domestic  consumption.  The  passing  of  the  acutest  phase  of 
competition  from  the  Gulf  ports  since  1906,  has  rendered  these 
questions  of  lesser  interest  of  late  years.  They  may  at  any 
time  be  revived,  but  seem  unlikely  to  regain  the  importance 
which  they  formerly  assumed. 


CHAPTER   XII 

THE   MOVEMENT  OF  RATES  SINCE   1870;    RATE   WARS 

Contrast  before  and  after  1900,  411. —  Revenue  per  ton  mile  data,  412.  — 
Their  advantages  and  defects,  414.  —  Natiu-e  of  the  traffic,  416.  — 
Low-grade  traffic  increasing,  416.  —  Growing  diversification  of  ton- 
nage, 418.  —  Present  conditions  illustrated,  419.  —  Length  of  the  haul, 
421. — The  proportion  of  local  and  through  business,  422.  —  Effect 
of  volume  of  traffic,  424.  —  Proper  use  of  revenue  per  ton  mile,  425.  — 
Index  of  actual  rates,  426.  —  lis  advantages  and  defects,  427.  — 
Difficulty  of  following  rate  changes  since  1900,  427.  —  Passenger  fares, 
429.  —  Freight  rates  and  price  movements,  4.30. 

Improvement  in  observance  of  tariffs,  431.  —  Conditions  in  the  eighties, 
432.  —The  depression  of  1893-1897,  433.  —  Resumption  of  prosperity 
in  1898,  436.  —  The  rate  wars  of  1903-1906,  438.  —  Threatened  dis- 
turbances in  1909-1911,  439. 

The  course  of  freight  rates  in  the  United  States  during  the 
last  generation  divides  naturally  into  two  periods,  before  and 
after  1900,  respectively.^  Prior  to  that  date  an  almost  uninter- 
rupted decline  took  place,  which  has  been  followed  by  a  strongly 
marked  upward  tendency  during  the  last  decade.  In  respect 
of  freight  rates  this  movement  is  commonly  judged  in  either 
of  two  ways;  by  comparison  of  actual  rates  charged  for 
specified  service  between  given  points  through  a  series  of  j^ears; 
or,  secondly,  by  means  of  what  is  called  the  revenue  per  ton 
mile.  Considering  first  the  use  of  this  latter  index,  the  course 
of  events  is  shown  by  means  of  the  diagram  opposite  the  next 
page,  covering  the  period  between  1867  and  1910.  But  before 
conclusions  may  safely  be  drawTi  from  this  showiag,  it  is  impera- 
tive that  the  true  significance  of  revenue  per  ton  mile  statistics 
should  be  set  forth.  For  a  generation,  and  particularly  in 
connection  with  the  Roosevelt  legislation  in  1906,  volumes  of 

1  U.  S.  Industrial  Commission,  XIX,  1901,  pp.  272-290;  Annals  of  the 
American  Academy  of  Political  Science,  1898,  pp.  324^352. 


412  RAILROADS 

written  and  oral  evidence  upon  moot  questions  were  based  upon 
such  figures.  Specious  and  misleading  reasoning  upon  a  public 
question  was  perhaps  never  more  common  in  the  course  of  our 
history.^  It  is  most  important  to  understand  clearly  the  real 
significance  of  this  common  statistical  unit.  We  shall  then, 
only,  be  in  position  to  interpret  the  diagram  properly. 

The  revenue  per  ton  mile  for  a  given  road,  or  for  the  rail- 
way system  of  the  United  States,  is  computed  by  dividing  the 
total  freight  revenue  for  that  service,  whatever  it  may  be,  by 
the  number  representing  the  amount  of  freight  in  tons  hauled 
one  mile.  Thus,  for  example,  if  the  total  freight  revenue  of 
a  system  of  roads  be  $900,000,000,  this  having  been  received  as 
compensation  for  hauling  an  equivalent  of  90,000,000,000  tons 
of  freight  one  mile,  the  compensation  actually  received  for  each 
ton  hauled  one  mile  is  obviously  one  cent.  All  that  is  neces- 
sary in  order  to  compute  the  average  revenue  per  ton  mile, 
then,  is  to  know  the  total  freight  revenue  and  the  amount  of 
ton  mileage  service.  Computed  in  this  way  the  average  revenue 
per  ton  per  mile  for  the  railways  of  the  United  States  in  1867  was 
1.92  cents.  From  this  level  a  decline  took  place  in  1890  to  0.941 
cents  —  that  is  to  say,  the  average  amount  received  for  each 
ton  of  freight  hauled  one  mile  had  declined  about  one  half. 
Since  about  1897  there  has  been  no  considerable  change,  the 
corresponding  figure  for  1911  being  0.757  cents.  In  other  words, 
at  the  present  time  the  carriers  of  the  United  States  receive 
about  three-fourths  of  a  cent  for  each  ton-mile  service.  From 
a  revenue  point  of  view  this  unit  may  seem  insignificant  in 
amount;  but  it  should  be  borne  in  mind,  of  course,  that  it  is 
applied  to  an  immense  volume  of  traffic.  Even  the  slight  in- 
crease between  1900  and  the  present  time,  if  applied  to  the 
volume  of  traffic  now  existing,  would  make  a  difference  in  freight 
revenue  for  the  entire  railway  system  of  the  United  States  of 
approximately  $61,000,000. 

1  Revenue  per  ton  mile  in  index  to  the  Senate  (Elkins)  Committee 
Hearings,  1905,  vol.  IV. 


RATES  SINCE   1870 

<EnrS    PER    TON    PER   MILE 


413 


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414  RAILROADS 

Measurement  of  the  course  of  freight  rates  by  means  of  rev- 
enue per  ton  mile  possesses  one  great  advantage.  It  measures 
the  actual  return  received  by  the  railway  without  regard  to  the 
published  tariff,  showing  accurately,  therefore,  the  degree  to 
which  any  departures  from  the  pubhshed  rates  take  place.  For 
this  reason  the  foregoing  diagram  probably  under-indicates  the 
extent,  relatively,  of  the  decline  before  1900.  For  it  is  in- 
dubitable that  the  published  rates  have  been  very  much  more 
nearly  observed  with  the  passage  of  time  during  this  decade.^ 
On  the  other  hand,  revenue  per  ton  mile,  as  thus  used  for 
general  purposes,  is  open  to  a  number  of  verj^  serious  objections. 
Obviously,  like  any  statistical  average  it  fails  to  represent  the 
actual  payment  for  any  given  service.  But  its  disadvantages 
are  more  deeply  seated  than  this.  Entirely  irrespective  of  any 
change  in  the  level  of  rates,  revenue  per  ton  mile  is  affected 
fundamentally  by  three  distinct  sets  of  conditions.  It  varies 
according  to  the  nature  of  the  traffic,  whether  high  grade  or  low; 
it  is  affected  by  the  length  of  the  haul  and  the  proportion  of 
local  as  distinct  from  through  business;  and  it  is  modified  pro- 
foundly according  to  the  volume  of  traffic  handled. 

Before  proceeding  to  the  consideration  of  the  above  men- 
tioned factors,  attention  may  be  directed  to  the  following  table, 
which  gives  the  extreme  range  of  ton-mile  revenue  for  a  number 
of  different  railways  arranged  in  groups  according  to  the  nature 
of  their  business. 

Each  group  is  graded,  moreover,  within  itself  according  to 
the  revenue  per  ton  mile.  From  this  showing  it  appears  that 
for  1910  the  range  above  and  l)elow  the  average  for  the  United 
States  is  considerable  —  being  upwards  of  three  times  as  great 
for  the  New  Haven  system  as  for  the  Chesapeake  &  Ohio,  which 
comes  at  the  foot  of  the  list.     It  will  now  be  in  order  to  explain 

'  Compare  conclusions  as  to  rebating  in  1900;  U.  S.  Industrial  Com- 
mission, XIX,  p.  285.  When,  as  in  1887,  a  general  departure  of  50  per 
cent,  from  published  rates  characterized  transcontinental  traffic,  the 
diflerence  between  the  theoretical  and  actual  revenue,  aa  measured  by 
the  published  rates,  is  very  great.     21  I.C.C.  Rep.,  349. 


RATES  SINCE  1870 


415 


Revenue  per 
ton  mile. 
1910  (Cents) 

New  England  — 

New  York,  New  Haven  &  Hartford        1.417 
Boston  &  Maine 1.08 

Southern  — 

Atlantic  Coast  Line 1.273 

Southern  R.R 957 

Louisville  &  Nashville 751 

Illinois  Central 589 

Western  and  Transcontinental  — 

Denver  &  Rio  Grande    1,279 

Southern  Pacific 1.232 

Union  Pacific    1.011 

Northern  Pacific 900 

Great  Northern    822 

Granger  — 

Chicago  &  North  Western 891 

Chicago,  Milwaukee  &  St.  Paul 843 

United  States,  all  roads 753 

Trunk  Lines  — 

Erie    626 

New  York  Central  &  Hudson  River  .        .625 

Pennsylvania  Railroad 580 

Baltimore  &  Ohio    577 

Lake  Shore  &  Michigan  Southern  . . .        .515 

Coal  and  Ore  — 

Philadelphia  &  Reading 765 

Lehigh  Valley 646 

Hocking  Valley    458 

Bessemer  &  Lake  Erie    453 

Norfolk  &  Western 447 

Chesapeake  &  Ohio 407 


Freight 
density. 

1,057,000 
1,046,000 


Av.  haul 
per  ton. 
(Miles) 

93.4 
102.8 


365,000  145 


1,124,000 

170 

1,445,000 

238 

532,000 

104 

745,000 

256 

1,091,000 

364 

940,000 

297 

814,700 

244.1 

729,000 

141 

709,000 

173 

1,071,000 

146 

2,808,000 

146. 

2,548,000 

195 

5,139,000 

168 

2,711,000 

191 

3,911,000 

171 

4,506,000 

97 

3,288,000 

174 

4,014,000 

125 

8,051,000 

118 

3,456,000 

264 

3,161,000 

267 

the  reasons  for  these  wide  variations,  which  are  by  no  means, 
as  is  customarily  assumed  in  public  discussion,  conditioned 
even  primarily  by  the  level  or  reasonableness  of  the  freight 
rates  charged.  Until  these  attendant  circumstances  are  fully 
understood,  any  conclusions  as  to  relative  freight  rates  for 
a  given  service  based  upon  revenue  per  ton  mile,  are  entirely 
misleading. 


416  RAILROADS 

The  nature  of  the  traffic  handled  by  a  carrier  is  the  most 
important  consideration  to  be  kept  in  mind  in  interpreting  rev- 
enue per  ton  mile  data.  This  is  most  clearly  shown  by  com- 
parison in  the  table  between  the  group  of  coal  and  ore  roads 
and  the  New  England  systems.  The  revenue  per  unit  of  service 
on  a  road  whose  traffic  is  largely  of  low  grade  most  necessarily 
be  low.  Probably  the  lowest  average  ever  reported  in  the 
United  States  was  for  the  Chesapeake  &  Ohio  in  1899  —  the 
low  point  in  the  general  movement  of  freight  rates  —  when  its 
ton-mile  revenue  touched  0.362  cents.  Whenever  the  business 
of  a  carrier  consists  largely  of  coal,  grain,  lumber  or  other  low- 
grade  commodities  on  which  the  freight  charges  must  neces- 
sarily be  exceedingly  low  in  order  that  the  freight  shall  move 
at  all,  the  revenue  per  ton  mile  must  consequently  stand  at  a 
low  figure.  Bald  comparison  of  any  such  revenue  with  a  cor- 
responding figure  for  high-grade  roads  is  obviously  misleading 
and  fallacious.  It  does  not  mean  that  the  latter  necessarily 
charges  more  for  the  same  service;  but  its  higher  revenue  per 
ton  of  freight  moved  one  mile  may  be,  and  very  likely  is,  merely 
due  to  the  fact  that  much  of  its  tormage  is  capable  of  bearing 
higher  charges.  From  this  circumstance  it  also  follows  that 
comparisons  from  year  to  year  either  for  single  roads  or  for  the 
entire  railway  net,  must  be  made  in  the  light  of  variations  in 
the  proportion  of  high  and  low  grade  tonnage.  The  trend  seems 
to  have  been  steadily  downward  in  this  regard  year  by  year. 
A  steady  increase,  relatively,  in  the  volume  of  low-grade  traffic 
has  long  been  under  way.^ 

The  development  of  the  last  twenty  years  in  the  United 

States  has  certainly  been  in  favor  of  a  great  increase  in  low-grade 

traffic.     This  is  shown  by  the  following  table,  giving  the  per 

cent,  of  tonnage  in  various  classes  upon  the  trunk  lines  from 

New  York  to  and  beyond  Chicago. 

1  The  movement  of  average  trainloads  in  connection  with  ton-mile 
revenue  bears  upon  this  point.  Thus  in  1905,  the  increased  trainload, 
accompanied  by  a  lower  ton-mile  revenue,  points  specifically  to  an  increase 
in  low-grade  traffic. 


RATES  SINCE   1870  417 

Per  Cent,  of  Tonnage  in  ^ach  Class  of  Freight  on  Trunk 
Lines,  West-Bound  ^ 

Class  1878      1880      1885      1890      1892 

1        30.4     26.4     24.8     21.0     19.9 

2         6.9     6.7     7.1     6.4      5.4 

3         4.8     4.4     4.2     12.3     11.3 

4       57.9     50.1     29.3     12.7     10.4 

5      0.0     10.6     34.6     10.0      9.6 

Q    [    0.0     0.0     0.0     37.6     43.4 

Special  0-0  1-8  0.0  ■■■■  •••• 

100.0         100.0         100.0         100.0  100.0 

From  this  it  appears  that  ''sixty  per  cent,  of  the  tonnage  is 
now  (1893)  carried  in  fourth,  fifth  and  sixth  classes.  .  .  .  Prior 
to  1886  no  considerable  number  of  articles  were  permanently 
assigned  to  the  fifth  and  sixth  classes;  they  embraced  usually  a 
few  commodities  which  had  been  assigned  a  special  rate." 
Further  consideration  of  this  table  shows  that  first-class  freight, 
forming  thirty  per  cent,  of  the  tonnage  in  1878,  declined  to  less 
than  twenty  per  cent,  in  1892;  while  at  the  same  time  sixth- 
class  freight  ran  up  from  nothing  to  43.4  per  cent,  in  1892. 
Fourth-class  freight  declined  during  the  same  period  from  57.9 
to  10.4  per  cent.  These  figures  simply  mean  that  a  great  deal 
of  traffic  is  now  carried  upon  American  railways  for  long  dis- 
tances which  a  generation  ago  it  was  believed  could  not  be 
profitably  moved  at  all.  The  utility  of  the  railway  service, 
once  supposedly  confined  entirely  to  freight  of  the  higher  classes, 
has  been  gradually  extended  until  today  there  is  no  commodity 
too  cheap  to  be  handled  with  the  improved  facilities.  This 
vast  increase  in  the  amount  of  low-grade  traffic  is  undoubtedly 
responsible  to  some  degree  for  the  apparent  dechne  of  freight 
rates  so  often  instanced.  Fortunately  upon  this  point  we  have 
the  specific  testimony  of  traffic  managers  of  long  experience. 
On  the  other  hand,  in  justice  to  the  railways  it  must  be  admitted 
that  the  proportion  of  local  business  at  high  rates,  which  would 
tend  to  increase  the  average  revenue  per  ton  mile,  has  steadily 
increased  with  the  growth  of  the  country;  and,  moreover,  as  has 

^  Senate  Finance  Committee  Report  on  Prices,  1893,  Part  I,  p.  437. 
VOL.  1—27 


418  RAILROADS 

already  been  shown,  in  times  of  exceptional  prosperity  the  move- 
ment of  high-grade  freight  has  increased  in  more  than  its  due 
proportion.  1  Nor  are  these  facts  adduced  in  criticism  of  Amer- 
ican railway  policy.  They  are  simply  intended  to  draw  atten- 
tion to  the  fact  that,  while  changes  of  freight  rates  have 
imdoubtedly  been  considerable,  they  have  not  been  as  great  as  is 
oftentimes  plausibly  stated.  As  for  comparisons  with  foreign 
countries,  they  are  practically  invalidated  by  the  difference 
in  local  conditions,  as,  for  instance,  in  England  where  local 
dehvery  is  involved.  In  the  United  States  such  service  is 
charged  ui  addition,  either  as  drayage  or  express. 

The  increased  diversification  in  the  freight  tonnage  of  Amer- 
ican railways,  always  in  the  direction  of  a  larger  proportion 
of  traffic  from  general  business  rather  than  from  the  movement 
of  staple  commodities,  is  also  of  great  fiscal  significance.  It 
means  not  only  more  business,  but  better  and  more  permanent 
traffic.  The  difference,  moreover,  between  the  charge  which 
high-grade  freight,  such  as  merchandise,  will  bear  by  comparison 
with  the  highest  rate  upon  grain  or  coal,  is  much  greater  than  any 
difference  in  the  cost  of  service.  The  profit,  therefore,  atten- 
dant upon  the  movement  of  traffic  other  than  low-grade  com- 
modities is  strikingly  great;  although,  of  course,  profitableness 
is  a  question  of  relativity  between  operating  cost  and  revenue. 
Heavy  train  loads  of  coal  at  4  mills  per  ton  mile  may  be 
better  business  than  merchandise  in  light  carloads  at  a  rate 
five  times  as  high.  At  all  events  the  tendency  toward 
higher  grade  tonnage  has  been  notable,  especially  since 
1900.  Many  western  roads  and  even  the  trunk  lines,  formerly 
dependent  in  a  great  measure  upon  the  movement  of  crops, 
are  now  affected  only  indirectly  in  this  regard,  by  reason  of 
their  influence  upon  general  business.  The  growing  diversifi- 
cation of  traffic  because  of  its  financial  importance  merits 
more  concrete   illustration. 

1  The  effect  of  periods  of  depression,  such  as  1903  and  1908,  upon  the 
proportion  of  low-grade  tonnage  is  a  moot  point. 


RATES  SINCE  1870  419 

The  Lake  Shore  &  Michigan  Sduthem,  during  the  calendar 
year  1900,  increased  its  freight  traffic  by  1,760,000  tons.  Of 
this  only  194,000  tons  were  specified  as  products  of  agriculture 
and  animals,  while  products  of  the  forests  actually  declined  by 
84,000  tons.  In  other  words,  nearly  all  of  this  phenomenal 
increase  in  business  in  1900  was  due  to  the  movement  of  manu- 
factures, minerals  and  merchandise.  A  comparison  made  for 
the  last  three  decades  makes  this  point  still  more  clear.  Since 
1880  there  has  been  very  little  increase  in  agricultural  tonnage 
upon  this  trunk  line,  with  an  actual  decrease  in  the  movement 
of  grain.  This,  perhaps,  may  be  in  part  explained  by  the  great 
development  of  grain  traffic  upon  the  lakes,  which,  of  course, 
absorbs  much  business  formerly  carried  by  this  road.  In  other 
words,  farm  products  and  provisions  transported  by  the  Lake 
Shore  rose  from  3,465,000  tons  in  1880  to  only  3,843,000  tons  in 
1900.  The  movement  of  petroleum  and  lumber  actually  de- 
*  creased,  owing  to  the  construction  of  pipe  lines  and  the  clearing 
of  the  forests.  On  the  other  hand,  manufactures  and  merchan- 
dise increased  three-fold  in  volume,  rising  from  3,754,000  tons 
in  1880  to  14,932,000  tons  in  1900.  Whereas  agricultural  pro- 
ducts in  1880  formed  over  forty  per  cent,  of  the  traffic  upon  the 
Lake  Shore,  they  constituted  in  1900  less  than  twenty  per  cent. 
Much  the  same  tendency  is  manifested  by  other  routes.  Thus 
for  the  fiscal  year  1901,  the  Chesapeake  &  Ohio  reported  sub- 
stantial decreases  in  the  actual  tonnage  of  flour,  grain,  sand, 
stone,  iron,  etc.;  but  a  largely  augmented  movement  of  general 
merchandise  of  the  higher  classes.  Many  of  the  soft-coal  roads, 
such  as  the  Cleveland,  Lorain  &  Wheeling,  which  used  to  carry 
nearly  two-thirds  of  their  tonnage  in  the  form  of  coal,  now  carry 
less  than  forty  per  cent.  A  feature  of  importance  in  the  great 
prosperity  of  the  anthracite  coal  roads  has  been  a  steady  increase 
in  the  volume  of  their  general  traffic  as  distinct  from  coal  ton- 
nage. All  over  the  country,  in  short,  the  steady  growth  of 
population  and  the  decline  in  the  proportion  of  grain  for  export 
is  reducing,  relatively,  the  importance  of  low-grade  tonnage, 


420 


RAILROADS 


supplanting  it  by  a  movement  of  supplies  and  merchandise  in 
the  contrary  direction. 

The  classification  of  tonnage  for  the  United  States,  as  a 
whole  and  by  main  divisions,  is  shown  by  the  following  excerpt 
from  Statistics  of  Railroads  for  1909: 

Freight  Traffic  Movement 


United  States 

Trunk  Line 
Territory 

Southern 
Territory 

Western 
Territory 

Class  of 
commodity 

Tonnage 

T071S 

Per 

Cent 

Tonnage 
Tons 

Per 
Cent 

Tonnage 
Tons 

Per 
Cent 

Tonnage 
Tons 

Per 
Cent 

Products    of 
agriculture. 

Products    of 
animals  .  . . 

Products    of 
mines 

Products    of 
forests  .... 

Manufac- 
tures    

Merchan- 
dise    

Miscellan- 
eous   

73,600,000 
20,600,000 

459.500,000 
97,100,000 

108,600,000 
33,900,000 
32,800,000 

8.92 
2.49 
55.60 
11.75 
13.15 
4.11 
3.98 

19,000,000 
7.600,000 
256,200,000 
21,500,000 
70,000,000 
13,500,000 
20,500,000 

4.65 
1.86 

62.71 
5.28 

17.15 
3.31 
5.04 

9,500,000 

1,000,000 

63,000,000 

25.300,000 

13,300,000 

4,800.000 

3,600,000 

7.92 

.83 

52.20 

20.95 

11.09 

3.98 

3.03 

45,100,000 
11,900,000 
140,200,000 
50,200,000 
25,100,000 
15,600,000 
8,600,000 

15.18 
4.03 
47.22 
16.92 
8.48 
5.26 
2.19 

Grand  total 

826,400,000 

100.00 

408,600,000 

100.00 

120,700,000 

100.00 

297,000,000 

100.00 

Conclusions  from  these  figures  are  well  worth  noting.  The 
importance,  measured  by  traffic  rather  than  revenue,  of  low- 
grade  freight  classed  as  products  of  mines,  is  notable.  This 
forms  more  than  half  the  aggregate  tonnage  for  the  United 
States,  and  has  appreciably  increased  within  the  last  ten  years. 
In  1910  it  constituted  almost  two-thirds  of  the  business  in  trunk 
line  territory  and  almost  one-half  in  the  West.  Products  of 
agriculture,  on  the  other  hand,  even  in  western  territory,  amount 
to  less  than  one-fifth  of  the  total  tonnage.  These  facts  indicate 
clearly  the  diverse  conditions  under  which  railways  operate  in 
different  parts  of  the  country.  The  next  table,  ^  besides  in- 
cidentally throwing  more  light  upon  the  relative  tonnage  of 
staple  commodities,  will  suffice  to  establish  our  main  point  — 
^  U.  S  Statistics  of  Railways,  1910,  p.  64. 


RATES  SINCE   1870 


421 


Average 

receipts  per 

Ton-mileage 

Revenue      ( 

ton  per  mile 

of  freight 

from  freight 

from  freight 

carried  in 

carried  in 

carried  in 

carload  lots 

carload  lots 

carload  lota 

Ton  miles 

Cents 

7,067,690,568 

$44,553,330 

0.630 

954,623,830 

9,731,590 

1.019 

689,594,719 

12,573,674 

1.823 

2,449,310,036 

29,802,514 

1.217 

724,239,606 

6,548,955 

.904 

5,104,428,347 

30,083,630 

.589 

22,228,778,428 

110,139,107 

.495 

11,891,569,514 

87,225,470 

.734 

Summary  of  Selected  Commodities  for  the  Year  Ending  June  30, 

19101 


Freight 
carried  in 
Gommodity  carload  lots 

Tons 

Grain 31,947,009 

Hay   5,856,185 

Cotton 3,400,316 

Livestock 10,754,108 

Dres.sed  meats .  .  2,407,454 

Anthracite  coal  .  28,202,577 

Bituminous  coal.  192,479,389 

Lumber 68,482,732 


namely,  that  the  nature  of  the  traffic  vitally  affects  all  ton  mile 
revenue  statistics.  It  entirely,  in  fact,  overshadows  mere 
changes  in  the  general  level  of  freight  rates.  Any  argu- 
ment concerning  the  movement  of  such  charges,  which  fails 
to  correct  fully  for  this  factor,  may  be  dismissed  at  once  as 
valueless. 

A  second  consideration  in  the  interpretation  of  ton  mile 
data,  of  equal  importance  with  the  natm-e  of  the  traffic,  is  the 
length  of  the  haul  and  the  proportion  of  local  as  distinct  from 
through  business.  This  necessarily  follows  from  the  nature  of 
a  distance  tariff.  Only  on  condition  that  the  rate  augmented 
in  direct  proportion  to  the  increase  of  distance,  would  the 
revenue  per  ton  mile  remain  constant.  The  diagram  at  page  108 
is  instructive  in  this  connection.  The  charges  —  denoted  by 
the  height  of  the  curve  at  any  given  point  —  tend  to  grow  much 
less  rapidly  than  distance.  In  other  words,  the  rate  curve 
approaches  a  parabolic  form,  mitil  after  a  certain  point  it  be- 
comes practically  a  flat  rate,  independent  of  distance.  This 
fact  of  necessity  causes  ton-mile  revenue  to  decrease  steadily 
with  the  length  of  the  haul.  For  ton-mile  revenue  is  but  the 
ratio  of  the  abscissa  to  the  ordinate  of  the  curve  at  any  given 
point;  the  former  being  the  rate  charged,  the  latter  the  distance. 

1  Mileage  of  roads  represented  on  June  30,  1910  —  130,395.46  miles. 


42^  RAILROADS 

In  practice,  therefore,  the  longer  the  haul  in  general,  the  lower 
is  the  revenue  per  ton  mile.^  This  is  clearly  shown  by  compari- 
son of  the  two  items  for  given  roads,  otherwise  similarly  circum- 
stanced, in  the  table  already  discussed  on  page  415. 

Closely  akin  to  the  length  of  haul  in  affecting  ton-mile  rev- 
enue, is  the  proportion  of  local  traffic.  This  also  is  in  practice 
vital.  Obviously  it  costs  much  more  to  handle  local  business, 
the  terminal  expenses  being  far  greater  in  proportion.  And  at 
the  same  time  a  larger  proportion  of  the  freight  moves  in  small 
lots  locally.  This  difference  between  revenue  per  ton  mile 
for  local  business  and  through  traffic  is  very  great.  On  the 
Louisville  &  Nashville,  for  example,  in  1886,  it  was  1.48  cents 
for  the  former,  as  against  .99  cents  for  through  business.^  The 
Illinois  Central  in  1900  reported  an  average  revenue  per  ton 
mile  on  through  freight  of  0.48  cents,  while  for  local  freight  the 
corresponding  figure  was  1.17  cents,  the  average  of  both  being 
0.56  cents.  It  is  apparent,  therefore,  that  any  accurate  deter- 
mination of  the  level  of  charges  in  general  must  take  account  of 
such  facts  as  these. 

Any  carrier  like  the  Southern  Pacific,  the  Chesapeake  & 
Ohio  or  the  Erie,  with  relatively  little  local  traffic  and  a  busi- 
ness dependent  largely  upon  the  long  haul,  will  conduct  trans- 
portation for  a  materially  lower  figure  than  roads  in  a  densely 
settled  territory.  This  consideration  was  recently  illustrated 
in  Massachusetts  experience.^  The  Fitchburg  Railroad,  de- 
voted to  long  distance,  low-grade  business  by  the  Hoosac  tunnel 
route,  was  consolidated  with  the  Boston  &  Maine  in  1900.  Its 
revenue  per  ton  mile  was  formerly  .818  cents  based  upon  such 
traffic.  When  it  was  merged  with  the  Boston  &  Maine,  —  con- 
siderably blessed  as  it  is  with  local  traffic,  —  the  latter's  ton-mile 
revenue  fell  from  1.44  cents  in  1900  to  1.158  cents  in  the  fol- 

1  CJ.  Ripley  Railway  Problems,  p.  509.     Cf.  also  p.  103,  supra. 

2  Senate  (Elkins)  Committee,  Digest,  App.  Ill,  p.  63,  brings  out  the 
high  proportion  of  local  business  in  the  South.  On  the  L.  &.  N.  80  per 
cent,  is  thus  classed. 

*  Mass.  Commission  on  Commerce  and  Industry,  1908,  p.  117. 


RATES  SINCE  1870  423 

lowing  year.     There  had  been  no  change  whatever  in  freight 
rates. 

A  word  may  be  interposed  in  this  connection  as  to  the  pe- 
culiar movement  of  local  as  distinguished  from  through  rates 
through  a  series  of  years.  Local  charges  have  decreased 
relatively  little,  probably  because  of  the  absence  of  competition 
in  such  cases.  They  have,  moreover,  decreased  very  unevenly 
in  different  parts  of  the  country.  Apparently  one  of  the  first 
and  most  beneficent  results  of  the  enactment  of  the  Act  to  Regu- 
late Commerce  in  1887,  was  a  reduction  of  local  rates  in  various 
parts  of  the  country,  in  order  to  bring  the  rate  adjustment  into 
conformity  with  the  long  and  short  haul  clause.  This  was 
peculiarly  the  case  in  the  northeastern  or  trunk  line  territory. 
It  does  not  seem  to  have  occurred  in  the  southern  states,  where 
the  long  and  short  haul  principle  has  never  been  accepted  in  its 
entirety.  The  most  comprehensive  report  upon  the  subject 
concludes  that  local  rates  have  in  various  parts  of  the  country, 
during  the  last  quarter  century,  been  reduced  from  ten  to  fifty 
per  cent.i  Returns  from  various  railway  commissions  inter- 
rogated by  the  Industrial  Commission  in  1900  upon  the  subject 
showed  highly  variable  results.  From  Mississippi  it  appeared 
that  "local  freight  rates  ui  this  state  have  been  materially 
lowered  in  the  last  four  years,  especially  in  the  lettered  classes"; 
while  in  the  adjoining  state  of  Alabama  "local  rates  on  freight 
have  decreased  very  little  in  the  last  five  or  six  years,  and  have 
not  decreased  in  proportion  to  the  decrease  made  in  interstate 
rates.  In  New  England,  comparison  of  actual  freight  rates 
did  not  indicate  any  very  considerable  reduction,  the  absence 
of  competition  in  this  section  being,  perhaps,  in  part  responsible 
for  this  result.  A  comparison  of  published  freight  rates  in 
southern  territory,  without  making  allowance  for  departures 
from  such  tariffs,  apparently  showed  a  very  much  smaller  reduc- 
tion than  in  other  parts  of  the  country.  It  is  also  apparently 
true  that  the  reduction  of  cotton  rates  in  this  section,  while 
1  McCain,  in  Senate  Finance  Committee  Report  on  Prices,  1893. 


424  RAILROADS 

considerable,  had  been  much  less  rapid  than  that  of  the  rates 
upon  grain  from  Chicago  to  the  seaboard  in  either  direction. 
A  few  instances  of  an  actual  rise  of  local  charges  since  1900  may- 
be cited. ^  But  the  fact  that  competition  has  been  substantially- 
eliminated  in  consequence  of  widespread  consolidation  since 
1900,  has  rendered  the  movement  of  local  and  through  freight 
rates  more  nearly  alike  all  over  the  country  than  they  were 
prior  to  that  time. 

The  third  consideration  which  must  always  be  kept  in  mind 
in  the  interpretation  of  revenue  per  ton  mile  is  the  volume  of 
the  traffic  handled.  Any  comparison  of  freight  rates  which  is 
not  made  in  the  light  of  increase  in  the  business  transacted,  is 
bound  to  be  misleading.  A  reduction  of  cost  of  operation  per 
unit,  attenchng  a  growth  in  volume,  has  already  been  fully  de- 
scribed in  connection  with  the  theory  of  rates.  And  it  is  but 
natural  that  a  reduction  in  the  rate  should  follow  any  lessening 
of  cost.  Moreover,  a  large  volume  of  business  usually  implies 
a  relatively  greater  amount  of  low-grade  tonnage.  In  order  to 
bring  out  this  relationship  the  second  column  in  the  table  on 
page  415  has  been  added.  This  permits  a  correlation  between 
freight  density  —  that  is  to  say,  ton  miles  per  mile  of  line  and 
revenue  per  unit  of  service.  It  will  be  noted  that,  in  general, 
the  revenue  unit  falls  as  the  volume  of  traffic,  measured  by 
freight  density,  rises.  This  is  strikingly  sho-wn  by  comparison 
of  the  groups  of  western  and  transcontinental  roads  with  those 
concerned  mainly  with  the  carriage  of  coal  and  ore.  The  soft 
coal  Hocking  Valley  road  with  its  enormous  density  and  very 
low  revenue  per  ton  mile,  affords  an  excellent  example.  It 
is  indubitable  that  the  trunk  lines  and  the  coal  roads  are  able 
to  transact  business  for  relatively  low  rates,  not  only  because 
their  tonnage  is  of  low  grade,  long  haul  or  both ;  but  also  because 
of  its  immense  concentration  per  mile  of  line,  permitting  all  of 
the  economies  incident  to  large-scale  operation.  In  this  con- 
nection, however,  it  should  be  noted  as  a  general  principle, 
1  I.C.C,  Annual  Rep.,  1903,  p.  150. 


RATES  SINCE  1870  425 

that  oftentimes  it  is  not  the  mere  increase  in  the  traffic  of  a 
particular  sort  which  is  significant;  but  rather  the  gro^\i;h  m 
the  total  volume  of  business  of  all  kinds. ^ 

The  foregoing  criticism  of  the  use  of  revenue  per  ton  mile 
as  a  means  of  showing  the  course  of  freight  rates  in  general  has 
been  mainly  destructive.  This  figure,  nevertheless,  will  in 
many  cases  be  found  highly  serviceable  in  the  examination  of 
particular  rates.  It  may  properly  be  used  to  determine  whether 
a  given  commodity  is  contributing  its  due  proportion  to  the 
general  budget  of  the  carrier.  Revenue  per  ton  mile  can,  of 
course,  be  computed  for  each  particular  service;  inasmuch  as 
both  the  income  and  the  volmne  of  that  service  are  matters  of 
independent  record.  The  table  on  page  421  brings  out  this 
point.  Or  take  a  division  of  the  Illinois  Central  for  1900.  Its 
revenue  per  ton  mile  was  0.136  cents  on  wheat,  0.79  cents  on 
flour,  4.267  cents  on  sugar-cane,  0.309  cents  on  soft  coal,  1.148 
cents  on  stone  and  sand,  2.238  cents  on  furniture,  3.165  cents  on 
merchandise.  On  this  basis  one  may  properly  inquire  as  to 
whether  under  all  the  circumstances  wheat,  coal  or  merchandise 
are  doing  their  part,  in  the  light  of  the  particular  expenses  at- 
tached to  their  carriage,  in  maintaining  the  general  burden  of 
indivisible  costs.  When  copper  yields  a  revenue  per  ton  mile 
of  only  0.285  cents,  the  rate  being  only  1.6  per  cent,  of  its  market 
value,  while  on  wheat  for  the  same  haul  the  corresponding 
unit  of  return  is  0.4  cents  per  ton  mile — equal  to  one-fifth  of  its 
worth  —  there  is  evidently  a  maladjustment  favoring  one 
commodity  over  another.^  In  a  number  of  recent  cases  ques- 
tions of  this  sort  have  been  rather  satisfactorily  answered  by 
resort  to  this  unit  of  measurement.^ 

The  curve  of  revenue  per  ton  mile,  as  showTi  by  diagram 
at  the  head  of  this  chapter,  certainly  gives  no  indication  of 


^  Emphasized  in  the  case  of  wool  rates.     23  I.C.C.  Rep.,  151. 
2  Samuel  O.  Dunn,  The  American  Transportation  Question,  p.  65. 
»  22  I.C.C.  Rep.,  617;    11  Idem,  296;    13  Idem,  418;    23  Idem,  7;   9 
Idem,  382,  etc. 


426  RAILROADS 

the  considerable  increase  of  freight  rates  which  has  ensued 
since  1900.  This  follows  from  the  fact  that  in  at  least  two 
of  the  three  respects,  above  mentioned,  the  trend  of  events, 
independent  of  any  change  in  the  level  of  freight  rates,  has 
operated  to  greatly  dilute  the  revenue  per  ton  mile.  The  growth 
of  low-grade  traffic  and  the  immense  augmentation  in  tonnage 
have  both  conspired  to  render  this  unit  entirely  useless  for 
purposes  of  comparison  year  by  year.  The  average  length  of 
haul  alone  seems  to  have  remained  much  the  same  during  the 
decade.  Although  the  curve  does  not  show  it,  there  has  been  a 
notable  upward  movement  all  along  the  line,  responsible,  as  we 
shall  see,  for  much  of  the  new  Federal  legislation.  How  may  we, 
then,  estimate  the  amount  of  these  increases?  Under  such  cir- 
cumstances, it  is  necessary  to  turn  to  the  movement  of  actual 
rates. ^  The  course  of  these  down  to  1900  is  best  shown  upon 
the  same  diagram  above  mentioned  by  means  of  the  dotted 
curve,  entitled  Actual  Rate  Index,  the  scale  for  which  is  given  at 
the  right.  This  rate  index  is  simply  the  average  of  the  actual 
published  rates  for  a  number  of  specific  commodities  between 
certain  given  points.  It  cUffers  in  principle  from  the  ton  mile- 
age revenue  curve,  in  that  it  concerns  merely  the  published 
rates,  taking  no  account  of  rebates  or  departures  from  those 
rates  in  actual  practice.  A  comparison  of  its  course  with  that 
of  the  ton  mileage  curve  shows  a  more  abrupt  decline  from 
about  1878  to  1886,  since  which  year  the  course  of  both  lines  is 
about  parallel.  Its  irregularity  is  also  significant  as  illustrating 
the  violent  fluctuations  to  which  the  published  rates  were  sub- 

'  J.  R.  Commons,  Bulletin,  Bureau  of  Economic  Research,  No.  1,  July, 
1900;  unfortunately  not  continued  to  date. 

The  best  data  giving  actual  rates  and  classifications  is  the  Forty  Year 
Review,  etc.,  published  by  the  Interstate  Commerce  Commission,  as  "Rail- 
ways in  1902,"  part  II,  1903;  continued  in  Senate  (Elkins)  Committee, 
Digest,  App.  II,  1905;  and  58  Cong.,  2nd  sess.,  Senate  Doc.  No.  257, 
savagely  attacked  in  Bull.  II,  Chicago  Bureau  of  Railway  News  and 
Statistics,  1904.  The  largest  collection  of  material  is  in  the  Senate 
(Aldrich)  Committee  Report  on  Prices,  1890,  I.  pp.  397-658,  covering  the 
period  1852-1890.  Also  Bulletin  15,  Misc.  Series,  Div.  of  Statistics,  U.  S. 
Dept.  of  Agriculture,  1898,  pp.  1-80. 


RATES  SINCE   1870  427 

jected  prior  to  1887.  Judged  by  this  curve,  the  situation  has 
been  more  settled  since  the  enactment  of  the  Act  to  Regulate 
Commerce  in  1887. 

Were  data  at  hand  for  a  continuation  of  this  line  to  1910  it 
would  undoubtedly  afford  a  fairly  reliable  measure,  in  general, 
of  the  substantial  increase  of  rates  which  has  taken  place  during 
the  decade.  The  main  objection  to  it  would  be  that  it  did  not 
weight  the  average  according  to  the  volume  of  the  business  car- 
ried for  each  of  the  thirty-seven  concrete  rates  chosen.  * 

Tracing  the  rise  of  actual  rates  since  1900  is  rendered  pecul- 
iarly difficult,  also,  by  reason  of  the  fact  that  few  of  the  changes 
took  the  form  of  an  outright  advance  in  charges.  The  end  in 
view  was  more  often  accomplished  surreptitiously.     The  sub- 

1  The  continuation  of  Commons'  index  number  of  freight  rates  to 
date,  seemed  inadvisable  on  account  of  the  changes  in  traffic  conditions 
which  have  taken  place.  Originally  well  selected,  the  thirty-seven  rates 
chosen  in  1900  are  not  now  representative.  There  are,  for  instance,  no 
transcontinental  quotations  at  all;  none  from  the  southern  states,  such  as 
on  raw  cotton;  none  for  the  great  staples  elsewhere  moving  under  com- 
modity ratings,  such  as  iron  ore,  chemical  fertilizers,  lumber,  citrus  fruit, 
etc.  Moreover,  twelve  of  the  thirty-seven  items  chosen  by  Commons  were 
rates  on  petroleum  which  now  moves  in  bulk  in  pipe  hues  except  locally. 
Several  of  the  quotations  for  coal,  and  for  all  the  other  carload  rates,  as  a 
matter  of  fact,  have  been  so  affected  by  changes  in  carload  minimum  rules, 
that  the  mere  rate  by  itself  has  httle  significance. 

Rejecting  Commons'  particular  index  number  by  reason  of  its  inherent 
defects  does  not,  however,  lessen  the  desirability  of  choosing  some  other 
combination  of  rates  which  may  be  used  as  a  standard  for  measurement 
of  rate  changes  year  by  year.  Yet  the  selection  of  such  an  index  number  is 
open  to  all  the  difficulties  attaching  to  a  similar  index  number  of  prices. 
Is  the  object,  for  example,  an  academic  determination  of  rate  changes 
per  se;  or  is  it  intended  to  ascertain  the  financial  burden  of  such  charges 
upon  the  community?  In  the  former  case  the  volume  of  traffic  affected 
would  not  be  an  important  consideration.  Local  rates  on  indigo  or  mil- 
linery would  be  given  the  same  weight  as  similar  changes  in  the  rate  on 
wheat  between  Chicago  and  the  Atlantic  seaboard.  The  latter  mode  of 
approaching  the  question,  on  the  other  hand,  would  correspond  to  an  index 
number  of  prices,  weighted  according  to  the  volume  of  consumption.  A 
doubled  freight  rate  on  hard  coal  to  Perth  Amboy  would  outweigh  an  equal 
change  in  the  charge  on  castile  soap  in  exact  proportion  to  its  commercial 
importance  as  measured  by  the  total  tonnage  transported.  Many  such 
details  would  call  for  careful  consideration  before  the  final  adoption  of  the 
rate  items  chosen  to  constitute  the  index  number;  btlt  the  Interstate  Com- 
merce Commission  might  well  consider  the  initiation  of  such  a  statistical 


428  RAILROADS 

stantial  increases  in  1900  ^  which  inaugurated  the  upward 
movement  were  mainly  accompHshed  by  changes  of  classifica- 
tion. Modification  of  the  carload  ratings  brought  about  the 
same  result.  A  notable  instance  appeared  in  the  complaint  of 
the  dairy  men  in  Wisconsin  in  1909.  An  annual  shipment  of 
38,000,000  lbs.  of  cheese  to  Chicago  before  1899  moved  at 
twenty  cents  per  one  hundred  pounds,  irrespective  of  the  size 
of  the  consignment.  Ten  years  later  the  rate  had  become 
twenty-eight  cents  for  less-than-carload  lots,  and  twenty-two  and 
one-half  cents  for  wholesale  shipments.  The  relative  disability 
of  the  small  shipper  under  the  new  circumstances  is  as  signifi- 
cant as  the  rise  of  rate  for  all.-  The  increase  of  charges  might 
be  brought  about  in  another  way  without  actually  advancing 
rates  by  a  withdrawal  of  commodity  ratings,  thereby  subject- 
ing the  shipper  to  the  higher  scale  of  classified  commodities. 
And,  finally,  a  practical  elimination  of  the  rebate  and  the  cessa- 
tion of  general  rate  wars  has  usually  resulted  in  a  very  substan- 
tial increase  in  the  revenue  of  the  carriers  as  well  as  in  the  scale 
of  charges  imposed  upon  most  shippers.  Evidence  upon  this 
point  is  officially  given  in  connection  with  the  rate  increases  of 
1903.=^  It  thus  appears  that  to  follow  step  by  step  the  move- 
ment of  actual  rates  is  an  extremely  complicated  matter.  Every 
factor  entering  into  the  determination  of  the  charge  must  be 
considered;  the  distance  tariff,  the  classification,  minimum 
carload  rules  and  a  host  of  other  specifications  which  enter  into 
the  final  result.     For  our  purposes  it  must  suffice  that  the  fact 

project,  endeavoring  to  do  for  railroad  rates  what  the  Federal  Commis- 
sioner of  Labor  performs  so  satisfactorily  in  officially  recording  current 
changes  in  the  price  of  commodities.  Such  a  record  of  railroad  rates 
extending  over  a  series  of  years,  supplemented  by  data  for  ton  mileage 
revenue,  would  be  invaluable  in  the  determination  of  the  reasonableness 
of  rate  advances  in  future;  even  as  the  rate  increases  of  1910  clearly 
pointed  to  the  need  of  a  similar  standard  for  purposes  of  comparison  from 
year  to  year  in  the  past. 

1  U.  S.  Industrial  Commission,  XIX,  pp.  281-291;  58th  Cong.,  2nd 
sess.,  Sen.  Doc.  2.57. 

'  16  I.C.C.  Rep.,  85.  For  other  instances  compare  12  I.C.C.  Rep., 
149,  and  23  I.C.C.  Rep.,  158.  '  9  I.C.C.  Rep.,  382. 


RATES  SINCE  1870  429 

of  a  substantial  rise  of  charges  since  the  turning  point  in  1900 
is  beyond  question.  ^  On  the  other  hand,  it  is  indubitable  that 
such  increases  as  have  occurred,  arousing  vehement  protest 
among  shippers,  have  been  more  \\idely  advertised  than  changes 
in  the  opposite  direction.  Substantial  reductions,  especially  on 
low-grade  staples,  have  sometimes  occurred.  One  is  almost  at 
a  loss  to  strike  a  fair  balance  between  the  two,  in  the  absence 
of  dependable  data. 

The  movement  of  passenger  fares  has  been  quite  different 
from  that  of  freight  rates.^  No  marked  decline  during  the  last 
quarter  of  the  nineteenth  century  took  place.  Gro^vi-h  in  the 
volume  of  traffic  was  not  accomphshed  by  a  reduction  of  charges. 
This  is  in  consonance  •s\dth  the  experience  of  foreign  countries. 
Passenger  business,  while  steadily  growing,  has  increased  less 
rapidly  than  freight  toimage.  Generally,  in  other  words,  as 
measured  by  volume,  freight  business  has  become  relatively 
more  important  vdih  the  progress  of  time.  Fiscally  the  same 
thing  is  true.  Only  in  New  England  does  the  revenue  from 
this  ser\ace  approximate  one-half  of  the  total  net  earnings. 
The  nature  of  railway  competition  explains  why  passenger  fares 
have  not  decreased  as  rapidly  as  freight  rates.  Persons  must 
necessarily  be  more  or  less  directly  transported  from  one  point 
to  another;  while  exjoerience  shows  that  competition  in  freight 
traffic  may  be  exceedingly  circuitous  m  route,  goods  even  going 
hundreds  of  miles  out  of  the  direct  line  for  transportation  by 
water.  This  narrowing  of  the  sphere  of  competition  in  the 
case  of  passengers  has  consequently^  operated  to  lessen  the 

1  For  further  examples  supplementing  om-  concrete  instances  above, 
the  following  citations  are  significant;  For  cattle,  11  I.C.C.  Rep.,  238, 
296  and  381;  13  I.C.C.  Rep.,  418;  23  I.C.C.  Rep.,  7;  for  soft  coal,  22 
I.C.C.  Rep.,  617;  for  hay,  9  I.C.C.  Rep.,  246;  for  transcontinental  rates 
in  general,  U.  S.  v.  Union  Pacific  Railroad,  etc..  Supreme  Court,  820. 
October  Term,  1911,  p.  558.  The  record,  so  far  as  the  general  advances 
of  1910  are  concerned,  will  be  considered  in  connection  with  the  legislation 
of  that  date,  in  chapter  XVIII. 

2  Annals  of  the  American  Academy  of  Political  Science,  1898,  pp.  324r- 
352. 


430  RAILROADS 

rate  of  decline.  Another  point  to  be  considered  in  this  connec- 
tion is  that  no  such  increasing  economies  in  the  handhng  of 
passengers  are  possible  as  in  the  case  of  freight.  Instead  of  de- 
creasing the  proportion  of  dead  weight,  which  for  passengers 
amounts  to  upward  of  ninety  per  cent.,  by  any  of  the  economies 
recently  applied  to  freight  traffic,  it  appears  rather  that  the 
proportion  of  dead  weight  of  equipment  per  passenger  is  in- 
creasing, o^vdng  to  the  necessity  of  providing  more  sumptuous 
accommodations.  Bearing  in  mind  all  these  facts,  it  appears 
not  unreasonable  that  the  progressive  decline  of  passenger  fares 
has  continually  lagged  behind  the  decrease  of  freight  rates. 
But  the  natural  lethargy  in  the  movement  of  passenger  fares 
was  rudely  interrupted  in  1908  in  connection  with  the  wave  of 
legislation  accompanying  the  Roosevelt  campaign  which  cul- 
minated in  the  Mann-Elkins  law.  A  widespread  demand  for 
lower  passenger  fares  found  expression  in  the  passage  by  twenty- 
two  states  within  five  years  of  maximum  fare  laws.  Eleven 
legislatures  fixed  the  charge  at  two  cents  per  mile,  the  others 
establishing  it  at  less  than  three  cents.  Many  appeals  to  the 
courts  in  connection  with  these  statutes  took  place  on  the  ground 
of  confiscation,  and  sharp  conflicts  of  authority  between  Federal 
and  state  governments  arose.  ^  Whether  passenger  rates  would 
ever  have  declined  without  such  exercise  of  authority  is  open  to 
question,  but  the  disturbance  of  estabfished  conditions  at  this 
time  was  extreme. 

One  further  question  with  relation  to  the  movement  of  rates 
merits  consideration.  In  how  far  has  the  rise  since  1900  been 
commensurate  vnth  the  general  upward  movement  of  prices  of 
other  commodities  than  transportation  —  the  particular  com- 
modity produced  by  railways?  The  e\ddence  tends  to  show  that 
prices  in  general  have  moved  upward  durmg  the  last  ten  years 
by  approximately  one-fourth,  and  it  may  be  even  one-third.- 
Have  railway  charges  in  general  surpassed  this  rate  or  not: 

1  Discussed  in  chap.  XX. 

2  Quarterly  Journal  of  Economics,  1907,  p.  618. 


RATE  WARS  431 

Some  activity  of  railway  experts  has  been  devoted  of  late  to  the 
elucidation  of  this  question.^  But,  after  all,  is  this  inquiry  of 
basic  importance  as  bearing  upon  the  general  reasonableness 
of  railway  rates?  Here,  as  so  often  elsewhere  in  the  discussion  of 
these  questions,  the  need  is  for  the  analysis  of  such  problems 
with  reference  to  particular  services  and  not  in  connection  with 
matters  in  general.^  It  is  conceivable  that  railway  rates  might 
and  properly  ought  to  increase  under  certain  circumstances 
much  more  than  in  proportion  to  the  general  change  in  freight 
rates;  or  that,  on  the  other  hand,  they  might  fairly  be  compelled 
to  lag  behind.  This  introduces  the  larger  question  of  reasonable 
rates  in  general  which  must  remain  for  discussion  in  our  second 
volume. 

The  general  level  of  rates  affects  the  ultimate  consumer 
more  than  the  shipper.  Steadiness  of  rates,  on  the  other  hand, 
is  vital  to  a  healthy  state  of  trade.  It  is  important  to  examine 
the  evidence  from  this  pomt  of  view.  The  history  of  railroad 
rates  shows  a  steady  improvement  in  the  direction  of  more 
general  observance  of  published  tariffs.  Periods  of  abject  de- 
moralization incidental  to  the  most  furious  rate  wars,  have 
alternated  with  periods  of  peace,  characterized  by  more  or  less 
faithful  observance  of  agreed  rates.  Viewed  in  a  large  way  the 
intervals  of  disturbance  have  become  less  frequent  and  less 
intense  with  the  passage  of  time.  Present  conditions  are  more 
satisfactory  than  any  which  have  prevailed  since  1850. 

Rate  wars  are  almost  as  old  as  railroading  and  are  coinci- 
dent with  the  appearance  of  competition.  Among  the  earliest 
of  note  were  the  struggles  between  the  Erie  and  the  New  York 
Central  as  soon  as  the  former  road  was  constructed  to  Dunkirk, 
Ohio,  on  the  Great  Lakes.     But  the  most  notorious  rate  wars 


1  Calculations  of  C.  C.  McCain  on  the  Diminished  Ratio  of  Railway- 
Rates  to  Wholesale  Commodity  Prices,  in  connection  with  the  increases 
in  1910. 

2  Well  expressed  in  a  recent  soft  coal  case;  22  I.  C.C.  Rep.,  617. 


432  RAILROADS 

were  those  which  prevailed  between  the  trunk  lines  in  respect  of 
the  carriage  of  grain  to  the  seaboard.  These  wars  began  with 
the  entrance  of  the  trunk  lines  into  Chicago  in  1869.^  The 
Baltimore  and  Ohio  from  the  outset  was  the  disturbing  factor. 
Having  no  entry  into  New  York  except  over  the  lines  of  the 
Pennsylvania  Railroad,  the  refusal  of  the  latter  in  1874  to  give 
proper  facilities  led  to  immediate  retaliation  by  rate  cutting  on 
the  Baltimore  and  Ohio.  The  details  of  these  wars  and  their 
economic  significance  have  become  classics  in  our  American 
industrial  history.  Suffice  it  to  say  that  for  intensity  and 
persistence  these  contests  which  lasted  for  ten  years  after  1884, 
have  been  unequalled  in  our  history  since  that  time.  A  brief 
period  of  calm  ensued  after  1876.  But  soon  the  struggle  broke 
out  again  in  1881,  intensified  by  the  construction  of  new  parallel 
trunk  lines  like  the  West  Shore  and  the  Nickel  Plate.  These 
latter  rate  disturbances  lasted  for  about  three  years. 

The  passage  of  the  Act  to  Regulate  Commerce  in  1887  greatly 
improved  the  rate  situation  for  a  time;  ^  but  harmonious  rela- 
tions were  rudely  shaken  by  a  bitter  rate  war  in  1888  between 
the  Grand  Trunk  Railway  and  the  American  Lines  with  refer- 
ence to  the  rates  upon  dressed  beef.  Trouble  over  this  traffic 
had  occurred  as  far  back  as  1879,  when  the  rate  from  Chicago  to 
New  York  had  been  cut  from  one  dollar  to  forty-five  cents. 
In  1888,  however,  the  rate  on  dressed  beef  for  weeks  was  as  low 
as  six  cents  per  hundred  pounds.  The  Grand  Trunk  which  had 
carried  almost  half  of  this  business  in  1887,  had  its  proportion 
reduced  to  twenty-eight  per  cent,  in  the  following  year.  At 
this  time  also  extensive  rate  wars  prevailed  in  the  far  western 
territory.  The  failure  of  the  Atchison  Road  brought  to  light 
accumulated  rebates  for  the  four  years  prior  to  1894  to  the 
amount  of  .$3,700,000.  The  prosperity  of  the  early  nineties 
led  to  a  considerable  improvement  in  rate  observances.     The 

1  Further  details  in  our  historical  summary  in  chap.  I. 

2  The  main  sources  of  the  following  chronicle  have  been  the  files  of 
Annual  Reports  of  the  Interstate  Commerce  Commission  and  of  the  Rail- 
ivay  Age  and  Age-Gazette. 


RATE  WARS  433 

only  exception  was  the  persistence  of  trouble  from  the  Canadian 
carriers.  The  Soo  line  across  the  Straits  of  Mackinac,  opening 
a  short  route  from  St.  Paul  and  Minneapolis  to  the  seaboard, 
was  acquired  by  the  Canadian  Pacific  Railroad  in  1890.  Com- 
bined lake-and-rail  grain  rates  were  sadly  disturbed  and  the 
controversy  over  so-called  ex-Lake  grain  between  the  lines  from 
Buffalo  to  New  York,  which  afterward  cropped  out  in  1900, 
took  its  beginning.  These  Canadian  Pacific  rate  wars  were 
severe  while  they  lasted.  In  1892,  for  instance,  the  rate  on  boots 
and  shoes  from  Boston  to  St.  Paul  dropped  from  one  dollar  and 
fifteen  cents  per  hundredweight  to  forty-five  cents. 

The  panic  and  subsequent  depression  of  1893  caused  serious 
and  widespread  rate  wars  all  over  the  country.  Grain  rates 
from  Chicago  to  New  York  were  openly  reduced  from  twenty- 
five  to  fifteen  cents.  Two  peculiarities  of  this  rate  war  deserve 
mention.  In  the  first  place,  every  concession  was  publicly 
made,  —  that  is  to  say,  the  cut  rates  were  filed  with  the  Inter- 
state Commerce  Commission;  and,  consequently,  owing  to  the 
percentage-basis  system  to  intermediate  points,  the  rate  war  on 
Chicago-New  York  business  automatically  induced  a  rate  war 
to  every  intermediate  point  in  Central  Traffic  Association 
territory.  Transcontinental  rates  were  also  badly  upset  at  the 
same  tune.  This  was  due  not  only  to  the  prevalent  hard  times, 
but  to  complications  arising  from  the  independence  of  the 
Panama  Railway.  This  line  had  been  controlled  since  1871 
by  the  Union  Pacific  Railroad.  The  arrangement  under  which 
the  Pacific  IVIail  Steamship  Company  was  also  controlled  came 
to  an  end  in  1893,  when  the  field  was  again  opened  to  competi- 
tion. The  merchants  of  San  Francisco  established  an  inde- 
pendent line  of  steamships  and  for  two  years  the  most  bitter 
and  reckless  rate  war  prevailed.  During  this  conflict  freight 
was  carried  from  New  York  to  San  Francisco  as  low  as  thirty 
cents  per  hundredweight.^      Matters   were   finally  settled  in 

^  A  carload  of  bamboo  steamer  chairs  across  the  continent  for  $9.40 
is  a  cut  to  the  bone  indeed.     21  I.C.C.  Rep.,  349. 
VOL.  1—28 


434  RAILROADS 

1898;  but  in  the  meantime  the  Union  Pacific  Railroad  had  gone 
into  bankruptcy. 

Entire  demoraHzation  in  freight  rates  throughout  the 
southern  states  occurred  in  1894.  Every  carrier  in  this  section 
was  involved.  Rates  were  cut  for  two  months  by  as  much  as 
two-thirds.  The  first-class  rate  from  New  York  to  Atlanta 
dropped  from  $1.14  to  forty  cents  per  hundred  pounds.  The 
years  1894-1895  for  the  country  as  a  whole  were  exceedingly 
unfortunate.  Better  conditions  then  supervened  except  for  a 
rate  war  on  grain  at  Missouri  river  points,  so  important  that  it 
was  made  the  subject  of  special  investigation.^  The  Chicago 
Great  Western  Railroad  through  the  agency  of  a  corporation 
kno^vn  as  the  Iowa  Development  Company  actually  purchased 
on  its  own  account  large  amounts  of  grain  in  order  to  secure 
its  carriage.  Grain  was  carried  from  Kansas  City  to  Chicago 
under  the  system  of  rebating  Imown  as  "protecting  the  through 
rate"  for  as  low  as  two  cents,  when  the  open  pubUshed  rate  was 
seventeen  cents  per  hundredweight.  Conditions  then  bettered 
somewhat  largely  through  the  activities  of  the  Joint  Traffic  and 
Trans-Missouri  Freight  Associations.  The  prospect  of  legali- 
zation of  pooling  by  Congress  was  bright.  Rates  seem  to  have 
been  observed  with  more  than  usual  faithfulness  throughout 
the  country,  the  only  exception  being  another  brief  conflict 
in  the  southern  states.  But  the  Trans-Missouri  decision  by 
the  United  States  Supreme  Court  in  1897,  declaring  these 
traffic  associations  illegal,  once  more  precipitated  most  un- 
satisfactory conditions.  And  these  were  accentuated  by  the 
budding  prosperity  of  the  following  year. 

With  the  return  of  activity  in  business  and  agriculture  in 
1898  a  frenzy  for  participation  in  the  rapidly  expanding  traffic 
once  more  brought  about  extreme  disorganization.  The 
Interstate  Commerce  Commission  reported  that  "a  large  part 
of  the  business  at  the  present  time  is  transacted  upon  illegal 

1  54th  Cong.,  2nd  sess.,  Sen.  Doc.  115,  is  as  fine  a  picture  of  utter  rate 
demoralization  as  can  be  found. 


RATE  WARS  435 

rates  ...  in  certain  quarters  the  observance  of  the  published  rate 
is  the  exception."  The  commissioner  of  the  St.  Louis  Traffic 
Bureau  testified  before  the  United  States  Industrial  Commis- 
sion that  "there  were  fewer  rates  maintamed  in  1898  than  at 
any  other  time  within  my  knowledge  of  the  railroad  business, 
and  I  have  been  in  the  railroad  business  for  twenty-eight  years." 
At  this  point  the  Interstate  Commerce  Commission  intervened 
by  the  proffer  of  its  good  offices.  Conferences  with,  the  heads 
of  the  principal  railroads  were  held.  A  decided  change  in  the 
attitude  of  the  Commission  toward  the  carriers  became  e\ddent. 
It  wisely  sought  to  arouse  the  railroads  themselves  to  the 
enormity  of  the  existing  evils,  being  absolutely  unable  itself 
under  the  law  either  to  prevent  or  correct  the  existing  abuses. 
The  result  fully  justified  all  expectations.  The  following  year 
witnessed  an  almost  complete  restoration  of  pubhshed  rates, 
although  business  continued  to  expand  in  volume.  Naturally 
there  was  ample  for  all  the  railroads  to  handle.  This  condition 
lasted  for  some  time.  But  during  1900  rate  cutting  agam  de- 
veloped upon  a  large  scale  in  westbound  business.  The  great 
increase  of  eastbound  shipments  and  the  demand  for  return 
lading  at  any  price  was  undoubtedly  the  cause.  This  condi- 
tion lasted  for  some  months. 

Rate  cutting  between  the  trunk  lines  again  broke  out  in  the 
spring  of  1901,  grain  being  hauled  as  low  as  eleven  cents  per 
hundred  pounds  from  Chicago  to  New  York.  Competition 
between  the  Lake  line  railroads  seems  to  have  been  the  cause. 
The  problem  of  adjusting  ex-Lake  grain  rates  dates  from  this 
period.  The  community-of-interest  plan  of  trunk  line  control 
was  ineffective  to  prevent  disturbance.  In  the  same  year  a 
passenger  rate  war  from  the  Missouri  river  to  California  was 
also  threatened.  The  United  States  Industrial  Commission 
sent  out  a  number  of  inquiries  concerning  conditions  in  the 
summer  of  1901.  This  indicated  a  firm  and  stable  rate  condition 
in  the  East  but  some  disturbance  on  lines  between  Chicago  and 
the   Ohio   river  points.      Trouble  soon  broke  out,   however. 


436  RAILROADS 

The  Atchison  road  suspecting  its  competitors  of  bad  faith,  cut 
its  rates  first-class  from  Chicago  to  the  Missouri  river  from 
eighty  cents  to  fifty  cents  per  hundredweight.  Agreements 
were  repeatedly  made  and  almost  immediately  violated,  some 
of  the  strongest  lines  being  the  worst  offenders.  During  the 
fall  of  that  year  export  rates  on  flour  and  grain  were  badly 
slashed.  The  traffic  manager  of  the  New  York  Central  lines 
testified  that  grain  rates  for  export  were  not  maintained  for  a 
number  of  months. 

Apparently  the  general  situation  in  1900  was  more  satisfac- 
tory than  at  any  previous  time  in  the  history  of  railroading 
in  the  United  States.  With  few  exceptions  the  published  rates 
were  observed.  This  commendable  situation  seems  to  have 
been  due  to  several  causes.  Primarily  an  adequate  apprecia- 
tion by  the  railroads  themselves  of  the  losses  of  revenue  to  which 
they  had  voluntarily  subjected  themselves  prevailed.  An 
enormous  volume  of  traffic  incident  to  general  prosperity,  also, 
almost  overtaxed  the  facilities  of  the  carriers.  And,  in  the 
third  place,  the  spread  of  consolidation  and  the  community-of- 
interest  idea  undoubtedly  contributed  to  the  same  end.  The 
determined  attitude  taken  by  important  roads,  notably  the 
Southern  Railway,  contributed  to  the  maintenance  of  rates. 
Even  in  the  Far  West  and  Northwest,  rate  conditions  seemed  to 
be  in  better  shape  than  at  almost  any  previous  time.  But 
it  was  too  good  to  last;  trouble  soon  broke  out  again.  Grain 
rates  from  Kansas  to  Chicago  during  the  summer  dropped 
from  nineteen  cents  to  seven  cents.  Rates  on  packing-house 
products  became  utterly  demoralized.  So  bad  did  conditions 
become  that  in  March  of  1902  the  Interstate  Commerce  Com- 
mission intervened,  seeking  injunctions  in  the  Federal  courts 
against  any  departure  from  the  published  tariffs.  This  im- 
mediately bettered  conditions;  and  in  February  of  1903  the 
passage  of  the  Elkins  law,  as  we  shall  see,  contributed  still 
further  to  this  end.  The  enactment  of  this  statute,  passed  at 
the  soUcitation  of  the  carriers  themselves  and  imposing  much 


RATE  WARS  437 

severer  penalties  upon  departure  from  published  rates,  brought 
about  conditions  during  the  spring  of  1903  unsurpassed  for 
stability.  The  only  exception  was  a  minor  disturbance  con- 
cerning the  carriage  of  ex-Lake  grain  from  Buffalo  to  New  York. 
Tariffs  seem  to  have  been  faithfully  maintained  throughout  the 
country  ^nth  one  exception,  that  is  to  say,  concerning  traffic  to 
and  from  Alissouri  river  points. 

Since  the  passage  of  the  Elkins  Amendments  in  1903,  the 
phenomenal  development  of  export  trade  through  the  Gulf 
Ports,  principally  New  Orleans  and  Galveston,^  has  been 
mainly  responsible  for  recurring  and  often  ferocious  rate  wars, 
particularly  during  the  years  1903-1906.  These  rate  wars  were 
usually  precipitated  in  the  first  instance  by  struggles  between 
the  Gulf  railroads  and  the  trunk  lines  for  the  carriage  of  export 
corn.  In  1904,  for  example,  after  a  long  period  during  which 
little  surplus  corn  was  available  for  export  from  Iowa,  Kansas 
and  Nebraska,  much  of  it  being  locally  consumed  for  stock 
feeding,  a  large  surplus  was  left  over.  Rates  were  promptly 
cut  during  1905  by  both  sets  of  lines.  Thus  the  rate  on  export 
corn  from  Omaha  to  New  Orleans  was  reduced  from  eighteen 
to  eleven  cents  per  hundred  pounds.  This  cut  was  promptly 
met  by  a  reduction  of  rates  from  Missouri  river  points  to  Chicago 
from  twenty-four  to  thirteen  cents.  The  rate  from  Omaha  to 
New  York  dropped  to  the  extraordinarily  low  figure  of  thirteen 
cents  per  hundred  pounds.  The  Burhngton  and  Missouri 
Pacific  Railroads  were  particularly  active  in  this  contest;  to- 
gether securing  over  eighty  per  cent,  of  the  corn  traffic,  although 
five  other  important  roads  were  operating  in  this  territory. 
All  through  the  winter  and  spring  of  1905  the  struggle  went  on 
unabated.  The  Gulf  ports  during  this  period  increased  their 
exports  of  corn  two  and  one-haK  times  over.  The  struggle 
was  not  alone  confined  to  the  carriage  of  grain;  although  export 
flour  being  manufactured  so  far  north,  seems  to  have  been 
immune  from  disturbance.  The  trouble  extended  over  into 
^  Shown  by  diagram  at  p.  32,  supra. 


438  RAILROADS 

the  field  of  packing-house  products  for  export.  It  was  long 
thought  that  this  could  not  be  shipped  over  the  roundabout 
southern  route,  but  its  practicability  was  demonstrated  at 
this  time.  The  demand  of  the  Gulf  roads  for  a  ten  per  cent. 
differential  rate  in  their  favor  as  an  offset  for  the  greater  time 
requisite  for  transit,  not  being  accorded,  rates  were  again  cut 
by  one-third,  sometimes  being  as  low  as  twenty  cents  per 
hundred  pounds. 

The  rate  wars  of  1905  in  the  carriage  of  export  traffic  imme- 
diately spread  into  the  field  of  imports.  Competition  for 
transcontinental  and  far  western  business  has  always  been  keen 
by  the  Gulf  routes.  The  notable  Import  Rate  case  ah-eady  dis- 
cussed, offers  a  good  illustration  of  this  fact.  The  great  volume 
of  tonnage  moving  outward  through  Galveston  and  New  Or- 
leans necessitated  a  correspondingly  heavy  northern  and  north- 
western movement  of  empty  cars.  Hence  the  railroads  leading 
from  the  Gulf  ports,  actively  bid  both  against  one  another  and 
in  connection  ■with,  the  steamship  lines  against  the  trunk  lines. 
Competition  was  particularly  keen  for  the  carriage  of  the  large 
volume  of  sugar  to  the  Middle  West,  particularly  Missouri  river 
points  like  St.  Louis  and  Omaha.  Carriers  from  every  point 
of  the  compass  were  interested  in  this  traffic.  The  trunk  lines 
brought  refined  sugar  from  the  seaboard  cities  where  the  West 
Indian  product  is  concentrated.  The  Gulf  fines  brought  the 
Louisiana  product,  partly  as  a  back-load  against  exported  grain. 
And  the  transcontinental  lines  brought  the  Hawaiian  sugar,  also 
as  a  back-load  against  a  predominance  of  westbound  tonnage. 
All  hands  thus  cUrectly  took  part.^  For  three  years  this  sugar 
war  persisted  despite  all  attempts  at  harmony.  Rates  were 
constantly  cut  by  fifty  per  cent.,  always  of  course  to  the  profit 
of  the  large  sugar  refiners.  Coffee,  also  constituting  an  import- 
ant part  of  our  import  trade,  and  of  course  particularly  adapted 
to  entry  through  the  Gulf  ports,  was  carried  at  ruinous  rates. 
Thus  on  green  coffee  during  1905,  the  rate  from  New  Orleans 
1  Senate  (Elkins)  Committee,  1905,  pp.  2730  and  2874. 


RATE  WARS  439 

to  St.  Paul  was  cut  from  forty  to  fifteen  cents  per  hundred 
pounds,  while  coincidently  the  rate  on  sugar  dropped  from 
thirty-two  to  ten  cents.  The  struggle  for  import  business  ex- 
tended finally  to  all  imports  of  merchandise  from  Europe.  The 
Illinois  Central,  for  example,  actively  bid  for  the  imported  plate 
glass  business  about  this  time.  At  a  meeting  of  parties  con- 
cerned in  1905,  the  fact  developed  that  every  one  of  the  im- 
portant lines  had  entered  into  contracts  for  the  carriage  of  this 
traffic  at  rates  approximately  one-half  those  normally  prevalent. 
The  trunk  lines  of  course  had  to  meet  this  competition  or  lose 
the  business.  The  Pennsylvania  Railroad  cut  the  rate  on 
crockery  from  forty  to  eighteen  cents;  on  imported  seeds  the 
rate  dropped  from  fifty  to  twenty  cents  and  on  toys  from 
seventy-five  to  twenty-five  cents  per  hundred  pounds.  These 
rate  wars  it  will  be  observed  differed  neither  in  extent  nor  degree 
from  those  of  a  generation  earlier.  One  cannot  avoid  the  con- 
clusion that  the  utter  demoralization  of  rates  was  ended  only 
by  the  intervention  of  the  Federal  government;  first  by  the 
sturdy  and  determined  application  of  the  Elkins  Law  under 
President  Roosevelt's  personal  direction,  and  later  by  extension 
of  the  principle  of  supervision  and  regulation  by  the  Hepburn 
Act  of  1906. 

The  principal  breach  since  the  sugar  wars  was  a  rather  per- 
sistent and  locally  interesting  disturbance  of  westbound  im- 
port rates,  precipitated  in  the  spring  of  1909  by  the  Boston  & 
Maine  Railroad.  Its  object  was  to  overcome  the  disability 
against  the  port  of  Boston  in  the  matter  of  imports,  due  to  the 
differentials  allowed  at  Philadelphia  and  Baltimore.^  This 
led  to  a  general  trunk  line  upset  lasting  about  four  months,  in 
the  course  of  which  rates  from  Boston  to  Chicago  were  reduced 
from  sixty-nine  to  fifty-eight  cents.  This  obviously  left  Httle 
profit  in  the  business.  Yet  it  was  a  mild  concession  as  compared 
with  the  struggles  of  earlier  years.  Two  years  later,  in  June, 
1911,  trouble  threatened  to  break  out  again.  This  time  it  was 
^  Cf.  p.  405,  supra. 


440  RAILROADS 

the  Delaware  &  Hudson  and  Erie  roads  which  filed  reduced 
rates  to  the  interior.  But  the  solidarity  of  feeling  between  the 
trunk  lines  was  such  that  an  open  breach  was  prevented  at  the 
last  moment.  The  prompt  intervention  of  the  Federal  authori- 
ties was  a  noticeable  feature  on  this  occasion.  It  may  somewhat 
safely  be  predicated  that  further  serious  disturbance  in  future 
is  unlikely  to  occur. 


CHAPTER  XIII 

THE  ACT  TO  REGULATE   COMMERCE  OF  1887 1 

Its  general  significance,  441.  —  Economic  causes,  442.  —  Growth  of  inter- 
state traffic,  442.  —  Earlier  Federal  laws,  443.  —  Not  lower  rates,  but 
end  of  discriminations  sought,  443.  —  Rebates  and  favoritism,  445.  — 
Monopoly  by  means  of  pooling  distrusted,  446.  —  Speculation  and 
fraud,  447.  —  Local  discrimination,  448.  —  General  unsettlement  from 
rapid  growth,  449.  —  Congressional  history  of  the  law,  450.  —  Its 
constitutionaUty,  451.  —  Summary  of  its  provisions,  452.  —  Its  tenta- 
tive character,  453.  —  Radical  departm-e  as  to  rebating,  454. 

Due  appreciation  of  the  significance  of  the  great  body  of 
Federal  legislation  concerning  railroads  which  has  accumulated 
during  the  last  quarter  century  in  the  United  States,  depends 
upon  a  clear  understanding  of  the  economic  events  of  the  period. 
Great  laws  are  not  the  figments  of  men's  minds,  conjured  up  in 
a  day.  They  are  a  response  to  the  needs  of  the  time.  Their 
true  causes  are  thus  immeasurably  complex.  Nor  does  a  whole- 
sale public  demand  for  legislation  arise  overnight.  From 
small  beginnings  the  pressure  steadily  grows,  oftentimes  for 
years;  until,  perhaps  through  a  conjuncture  of  particularly 
aggravating  events,  matters  are  at  last  brought  suddenly  to  a 
head.  Yet  while  this  culmination  of  industrial  or  social  pres- 
sure may  finally  result  in  legislation  under  some  particularly 
strong  political  leadership,  to  assign  such  personal  influence 
as  even  the  remote  cause  of  legislation,  is  to  belie  all  the  facts 
and  experience  of  history.     No  clearer  illustration  of  the  close 

1  The  following  references  are  best:  — 1866.  Hudson,  J.  F.  The 
Railways  and  the  Repubhc.  —  1877.  SeUgman,  E.  R.  A.  Political  Science 
Quarterly,  II,  pp.  223-264  and  369-413.  —  1887.  Nimmo,  J.  Legislative 
history  in  The  Railway  News,  currently  reported.  —  1887.  Painter,  U.  H. 
Compilation  from  the  Congressional  Record.  Privately  published.  — 
1888-1889.  Hadley,  A.  T.  Quarterly  Journal  of  Economics,  II,  pp.  162- 
187;  III,  pp.  170-187.  In  addition,  the  general  works  of  Hadley, 
Charles  Francis  Adams  and  Haney;  and  the  extensive  list  of  magazine 
articles  in  the  BibUography  on  Railways  of  the  Library  of  Congress,  1907. 


442  RAILROADS 

relationship  between  economic  causes  and  statutory  results 
could  perhaps  be  found,  than  in  the  field  of  our  Federal  legisla- 
tion concerning  common  carriers.  It  forms  one  of  the  most 
important  chapters  in  our  industrial  history. 

Several  of  the  economic  causes  of  the  Act  to  Regulate  Com- 
merce of  1887,  are  deep-rooted  in  the  preceding  decade.  A  few 
even  run  back  to  Civil  War  times.  Foremost  among  these  was 
the  rapid  expansion  of  the  railway  net;  and  particularly,  as 
outlined  in  our  introductory  historical  chapter,  its  phenomenal 
growth  during  the  eighties.  More  new  mileage  was  laid  down 
in  the  year  of  the  Act  itself  than  at  any  other  time  in  our  entire 
history  within  a  single  twelvemonth.  Of  equal  significance, 
however,  was  the  far  more  than  commensurate  development  of 
long  distance,  that  is  to  say,  interstate  business.  The  through 
carriage  of  livestock  and  grain  to  the  seaboard  for  export 
attained  immense  importance;  and  the  settlement  of  the 
Middle  West  called  for  a  corresponding  westward  movement  of 
manufactured  goods.  The  Windom  Committee  of  1874  on 
"Transportation  Routes  to  the  Seaboard"  ^  bears  eloquent 
testimony  to  the  growdng  importance  of  this  through  traffic 
as  a  factor  in  legislative  activity.  According  to  the  Cullom 
Committee  Report  twelve  years  later,-  approximately  three- 
fourths  of  the  railway  traffic  of  the  country  was  already  at  that 
time  interstate  in  character.  On  the  trunk  lines,  excepting 
the  Pennsylvania  Railroad  which  still  relied  more  largely  on 
Pittsburg-Philadelphia  tonnage,  more  nearly  nine-tenths  of  the 
traffic  consisted  of  through,  as  distinct  from  local,  business. 
Obviously,  this  pointed  to  the  assumption  of  authority  by  the 
Federal  government,  if  any  were  to  be  exercised;  inasmuch 
as  the  separate  states,  as  will  shortly  appear,  were  held  by  the 
Supreme  Court  of  the  United  States  in  1886  to  be  powerless  to 
deal  with  interstate  commerce. 

1  43d  Congress,  1st  session,  Senate  Report  No.  307,  2  pts. 
*49th   Congress,  1st  session.   Senate  Report  No.  46,   2  pts:   pt.   1, 
pp.  16  and  137-166. 


THE  ACT  OF   18S7  443 

The  growing  disposition  of  Congress  to  assume  control  over 
interstate  business  had  ah-eady  been  evinced  in  the  passage  of 
two  Federal  statutes.  One  in  1872  had  dealt  with  abuses  in 
the  carriage  of  livestock.  And  another,  even  earlier,  had  sought 
to  remove  obstacles  set  up  by  local  jealousy  and  monopoly  to 
the  through  carriage  of  goods.  Some  railway  charters  actually 
prohibited  railroads  from  making  connections  with  other 
lines;  or  from  allowing  oars  to  leave  their  own  rails.  The 
Erie,  for  example,  was  thus  hampered;  lest  the  trade  of  south- 
ern New  York  be  diverted  to  rival  seaports.  But  the  military 
necessity  of  through  transport  of  troops,  and  the  impediments 
to  speedy  and  cheap  carriage  of  mails  and  goods  through  delays 
at  junction  points,  impelled  Congress  to  authorize,  though  not 
as  yet  to  compel,  the  formation  of  through  routes  and  the  issue 
of  through  bills  of  lading  by  the  Act  of  1866.  The  immediate 
response  to  this  permissive  legislation  was  the  rise  of  the  private 
car  lines,  elsewhere  described,  in  connection  with  personal 
discrimination  and  also  in  the  general  historical  review.^ 

No  widespread  demand  for  a  general  reduction  of  railroad 
rates  seems  to  have  existed  in  1887.  In  this  regard  the  situa- 
tion is  strikingly  in  contrast  with  that  which  prevailed  during 
the  protracted  hard. times  succeeding  the  panic  of  1873.  Acute 
industrial  depression  during  that  period  had  aroused  deep  public 
feeling  against  the  "  extortions  of  soulless  railway  corporations." 
It  was  but  natural  that  all  the  farmers  in  the  newly  settled 
states  should  actively  participate  in  the  Granger  movement. 
The  popular  war  cry  in  this  agitation  was  lower  freight  rates. 
This  demand  is  voiced  in  the  President's  message  of  1872, 
calling  for  "more  certain  and  cheaper  transportation,  of  the 
rapidly  increasing  western  and  southern  products,  to  the  Atlan- 
tic seaboard."  The  proposals  of  the  Senate  to  attain  these 
objects  are  contained  in  the  above-mentioned  Windom  Com- 
mittee Report  of  1874.  Competition  is  to  be  stimulated  by  the 
development  of  waterways  and  new  trunk  lines.     A  bureau  of 

1  Pp.  140  and  192 


444  RAILROADS 

commerce  is  proposed.  The  long  and  short  haul  principle  in 
rate  making  is  to  be  enforced.  Stock-watering  is  to  be  pro- 
hibited; and  publicity  of  rates  to  be  brought  about.  On  the 
whole,  reduced  charges  are  to  be  secured  rather  by  means  of 
natural  competition  among  carriers  than  through  legislation. 
But  the  keynote  of  the  Windom  Report  of  1874  is  cheaper 
carriage  of  goods,  —  a  general  reduction  of  rates  all  along  the 
line. 

Many  things  happened  during  the  next  twelve  years 
to  modify  this  demand.  By  1886,  according  to  the  Cullom 
Committee,  ''the  paramount  evil  chargeable  against  the  opera- 
tion of  the  transportation  systems  of  the  United  States,  as 
now  conducted,  is  unjust  discrimination  between  persons, 
places,  commodities,  or  particular  descriptions  of  traffic." 
Purely  economic  events  had  brought  about  this  change  of 
opinion.  The  rate  wars  of  the  seventies;  a  revival  of  general 
prosperity  in  1879;  and  great  mechanical  improvements  and 
economies  in  operation,  had  brought  about  the  desired  decline 
of  freight  rates.  ^  For  the  time  the  bogey  of  extortionate 
charges  was  laid  at  rest.  The  Act  of  1887,  elaborate  as  it 
was  in  form,  seems  not  to  have  been  intended  to  deal  with 
rates  in  any  general  way.  It  was  in  the  main  aimed  at 
the  prevention  of  specific  abuses.  "The  practice  of  discrim- 
ination in  one  form  or  another  is  the  principal  cause  of  com- 
plaint." Consequently,  the  long  succession  of  bills  introduced 
in  the  House  of  Representatives  year  after  year  for  more  than 
a  decade  by  Judge  Reagan  of  Texas  and  others,  made  no  attempt 
to  provide  administrative  machinery  by  which  to  fix  rates  in 
general;  but  sought  merely  to  prohibit  these  specific  abuses  by 
statute.2  The  proposition  for  a  permanent  commission  to  deal 
with  rates  in  a  more  comprehensive  way,  seems,  as  we  shall  see, 
to  have  emanated  from  the  Senate  at  a  later  time.  But  this 
more  statesman-like  proposition  from  the  upper  chamber  was 
essentially  different  from  the  response  in  the  House  of  Reprc- 

1  In  detail  at  pp.  22  and  411,  supra.         ^  Cf.  Haney,  vol.  II,  p.  309. 


THE  ACT  OF  1887  445 

sentatives  to  popular  feeling  against  discriminatory  practices, 
which  slowly  gathered  force  during  more  than  a  decade  of 
agitation  and  debate. 

What  now  were  some  of  the  specific  "discriminations"  which 
these  various  bills  in  Congress  aimed  to  prevent?  And  why  did 
the  movement  come  to  a  head  in  1887?  The  evidence  is  con- 
clusive that  personal  favoritism  as  between  rival  shippers  took 
first  place.  The  indiscriminate  and  cut-throat  competition  of 
the  carriers,  particularly  in  connection  with  the  trunk  line  rate 
wars,  offered  a  golden  opportunity  to  those  in  search  of  secret 
and  preferential  rates.  ^  The  chief  offender,  of  course,  was  the 
Standard  Oil  Company  under  the  direction  of  John  D.  Rocke- 
feller. The  Cassatt  revelations  in  1877  as  to  exclusive  contracts 
with  the  great  trunk  lines  for  the  carriage  of  oil,  greatly  stirred 
public  opinion.  Congressional  attention  had  been  directed  to 
the  subject  some  years  before  by  complaints  from  the  Pennsyl- 
vania field.  But  the  abortive  results  of  the  investigation  of 
1875  demonstrated  nothing  beyond  the  shameful  impudence 
of  the  chief  offenders.  According  to  the  New  York  (Hepburn) 
Committee  investigation  in  1879,  few  shippers  had  ever  seen 
printed  tariffs.  The  Assistant  General  Freight  Agent  of  the 
New  York  Central  testified  that  one-half  the  business  out  of 
New  York,  and  nine-tenths  oat  of  Syracuse  went  on  special 
rates.  At  this  time  there  was  also  unrest  in  the  anthracite  coal 
trade.  Moreover,  the  activity  of  the  "eveners"  in  the  cattle 
business  in  1875-1879-  had  laid  the  foundation  for  still  other 
monopolies  built  up  by  means  of  rebates.  But  the  constant 
irritant  in  the  public  eye  was  the  Standard  Oil  Company.^  The 
Lake  Shore  case,  fought  through  every  Ohio  court  and  then  on 
appeal  up  to  the  Supreme  Court  of  the  United  States  in  1886, 

1  Cf.  pp.  22,  and  431,  supra. 

2  Select  Senate  Committee  on  Transportation  of  Meat  Products, 
1889,  p.  2,  etc. 

'  CJ.  the  chapter  from  Miss  Tarbell's  History  of  the  Standard  Oil 
Company,  reprinted  in  our  Railway  Problems.  Hudson,  pp.  55-106,  well 
summarizes  the  Hepburn  Committee  testimony. 


446  RAILROADS 

widely  advertised  the  discriminatory  practices  of  the  railroads. 
But  the  most  spectacular  disclosures  of  all  took  place  in  1885- 
1888  in  the  George  Rice  cases  in  Ohio.  The  Cullom  Committee 
in  recommending  publicity  of  rates  as  its  primary  remedy  for 
the  evils  of  the  time,  specifically  cites  "this  most  impudent  and 
outrageous"  proceeding.^  In  the  protracted  struggle  in  con- 
ference committee  upon  the  provisions  of  the  act,  elimination  of 
rebates  was  the  only  subject  upon  which  both  House  and  Senate 
conferees  were  in  thorough  accord  from  the  start.  Whatever 
the  commercial  crimes  chargeable  to  the  founder  of  the  Standard 
Oil  Company,  he  should,  at  least,  be  credited  with  the  per- 
formance of  a  great  public  service  in  finally  crystallizing  public 
opinion  in  1887  in  favor  of  railroad  legislation  for  the  prevention 
of  rebating. 

Distrust  of  monopoly  has  always  loomed  up  large  in  the 
public  eye.  The  dread  of  it  is  voiced  in  every  public  document 
of  the  time.  The  Windom  Committee  in  1874,  as  we  have  seen, 
looked  to  the  stimulation  of  railway  competition  as  its  chief 
remedy  against  high  rates.  Five  years  later,  the  Hepburn  Com- 
mittee in  New  York  vehemently  denounced  railroad  monopoly 
as  an  evil  to  be  sternly  repressed.  But,  in  the  meantime,  the 
carriers,  almost  prostrated  by  the  excesses  of  their  rate  wars, 
were  slowly  learning  how  to  cooperate  for  the  maintenance  of 
more  stable  charges.  Railroad  pools  and  traffic  agreements, 
first  essayed  about  1875,  were  gradually  elaborated;  until  by 
1886  nearly  all  parts  of  the  country  were  covered  by  them.^ 
From  small  beginnings  in  1877,  the  Trunk  Line  Association 
under  Albert  Fink  was  in  its  heyday  of  activity.  The  Southern 
Railway  Association  was  restoring  order  out  of  chaos,  south  of 
the  Ohio  river.  By  1886  all  competitive  traffic  north  and  west 
of  Chicago  was  pooled.  This  was  especially  true  of  the  highly 
competitive  business  between  the  Missouri  and  Mississippi 
rivers.     Even  in  remoter  regions,  such  agreements  threatened 

1  Op.  cit.;  vol.  I,  p.  199. 

*  Pooling  is  discussed  in  detail  in  volume  II. 


THE  ACT  OF  1SS7  447 

to  deprive  the  public  of  the  benefits  of  rival  railroad  construc- 
tion. In  Colorado  and  New  Mexico  public  sentiment  was 
deeply  aroused  over  the  tripartite  di\'ision  of  territory  between 
the  carriers  then  in  the  field. ^  The  helplessness  of  independ- 
ent railroads  was  made  evident  in  connection  with  the  attempt 
of  the  (now)  Colorado  &  Southern  road  to  gain  a  foothold. 
Its  suits  in  both  state  and  Federal  courts,  and  the  attempted 
remedial  legislation  by  Colorado  in  1885,  disclosed  the  great 
power  of  monopoly  over  the  public  welfare  in  that  region.  In 
Texas,  the  Gould-Huntington  apportionment  of  the  field  be- 
tween the  two  systems  in  1881, ^  was  doubtless  perceived  as  to 
its  results,  even  if  its  precise  terms  were  secret.  The  Texas 
Traffic  Association,  also,  organized  in  1875,  embraced  all  the 
lines  in  that  vicinity.  May  it  not  well  be  that  the  final  inclusion 
in  the  Act  of  1887  of  the  prohibition  of  pooling,  upon  direct 
insistence  of  the  Texas  representative  in  Congress  against  the 
protest  of  the  Senate,  had  some  connection  with  these  events? 
It  seems  clear  that  the  marked  interest  of  the  railways  in  elim- 
inating competition  all  over  the  country  at  this  critical  time, 
carried  great  weight  with  Congress  in  shaping  the  law. 

The  years  since  the  Civil  War  had  witnessed  an  ever  in- 
creasing volume  of  speculation  and  fraud  in  railway  affairs, 
which  reached  its  climax  in  the  frenzied  construction  period  of 
the  eighties.^  Jay  Gould,  "Jim"  Fisk  and  their  successors  who 
contributed  to  the  "railway  panic"  of  1884,  had  done  their  work 
well  in  arousing  public  hostility  to  the  railroads.  The  Hepburn 
Committee  Report  in  New  York  is  symptomatic  of  the  state  of 
feeling  in  its  vehement  denunciation  of  these  practices."*  The 
Windom  Committee,  five  years  earlier,  had  officially  registered 
its  opinion  that  of  all  the  abuses  of  the  time,  "none  have  con- 
tributed so  much  to  the  general  discontent  and  indignation  as 


1  University  of  Colorado  Studies,  V,  1908,  pp.  137-148. 

2  Bulletin,  University  of  Texas,  No.  119,  1909,  p.  73. 

*  Details  in  chapter  I  and  in  the  discussion  of  speculation  in  volume  II. 

*  Hudson,  op.  cit.,  pp.  251-286,  uses  much  of  this  testimony. 


448  RAILROADS 

the  increase  of  railway  capital  by  stock  watering  and  capitaliza- 
tion of  surplus  earnings.  The  murmurs  of  discontent  have 
swollen  into  a  storm  of  popular  indignation.  Your  committee 
believe  the  evil  to  be  of  such  magnitude  as  to  justify  and  require 
for  its  prevention  the  cooperation  of  both  Congress  and  the 
States."  ^  Nor  is  the  Cullom  Committee  less  emphatic  in  1886; 
although  its  condemnation  is  shifted  from  the  trunk  lines,  par- 
ticularly the  New  York  Central  and  the  Erie,  to  the  newly 
constructed  "unnecessary  roads."  "This  practice  (of  stock 
watering)  has  unquestionably  done  more  to  create  and  keep 
alive  a  popular  feeling  of  hostility  against  the  railroads  of  the 
United  States  than  any  other  one  cause."  -  All  were  agreed  that 
the  remedy  must  be  applied  by  the  states,  from  which  the  com- 
panies derived  their  charters.  But  a  powerful  impulse  toward 
publicity  of  accounts  and  operating  details  as  well  as  of  rates, 
to  be  enforced  by  the  hand  of  the  Federal  government,  was 
unquestionably  imparted  by  the  financial  scandals  of  the  time. 
It  was  hoped  that  fraudulent  construction  concerns,  subsidiary 
companies  for  "milking"  the  main  corporation,  unnecessary 
paralleling  of  existing  lines  for  purposes  of  blackmail,  specula- 
tive bankruptcies  and  all  similar  practices  of  the  period  might  be 
restrained  in  part  by  letting  in  the  fight  of  day  upon  their  affairs. 

Then  again,  there  were  the  discriminations  in  rates,  so  ve- 
hemently denounced,  against  the  small  towns  and  local  business, 
in  favor  of  the  large  cities  mainly  interested  in  long  distance 
traffic.  Such  jealousies  and  rivalries  of  course  antedate  the 
railroad.  They  are  almost  as  old  as  trade.  And  yet  the  course 
of  affairs  since  the  panic  of  1873,  had  lent  peculiar  force  to  them 
by  the  middle  of  the  eighties.  It  had  been  a  period  of  ruinous 
railroad  competition  all  over  the  land,  but  especiafiy  in  trunk 
line  territory.  Through  rates  had  fallen  tremendously;  with- 
out any  corresponding  change  in  local  charges.^  The  great 
western  cities  and  the  remote  farmers  were  the  immediate 
beneficiaries,  of  course.     But  there  were  the  older  communities 

»Pp.  72  et  seq.    ^Pp.  51  el  seq.    'Pages  22,  422,  supra,  and  456,  infra. 


THE  ACT  OF   1887  449 

of  the  East  to  be  reckoned  with/  —  the  farmers  of  New  England 
and  Middle  New  York  and  the  secondary  cities  which  had  once 
been  terminal  points  but  were  now  become  way  stations.  In 
the  South,  new  towns  were  springing  up,  anxious  to  divide 
distributive  trade  with  the  older  cotton  concentration  points. 
Nashville,  soon  to  take  first  place  in  a  celebrated  case,  was 
being  built  up  by  a  favoring  railway;  and  Atlanta,  a  purely 
railroad  to^^^l,  was  in  rapid  gro^vth  at  the  expense  of  older  rivals. 
The  separate  states  had  long  sought  to  deal  with  this  ancient 
evil  of  local  discrimination  in  rates  by  means  of  long  and  short 
haul  clauses;  but  to  little  effect.  What  wonder  that  the  Cullom 
Committee  in  1886,  heads  its  long  list  of  "complaints  against 
the  railroad  system  of  the  United  States"  by  two  forms  of  this 
alleged  evil! 

In  brief,  the  contemporary  evidence  all  goes  to  show  that, 
—  quite  aside  from  evil  intent,  —  the  railroad  business  of  the 
United  States  in  the  middle  of  the  eighties,  was  in  a  highly  dis- 
organized state.  Phenomenal  economic  development  since  the 
resumption  of  specie  payments  in  1879,  had  perhaps  outstripped 
the  capacity  of  managements  to  scientifically  order  their  affairs. 
Collateral  evidence  as  to  this  is  the  extraordinary  wastefulness 
of  operation  which  prevailed.  Competition  had  run  mad.  All 
of  the  tricks  and  vagaries  of  roundabout  routing  of  freight 
found  place.^  To  keep  pace  with  mere  operating  demands  was 
a  heavy  enough  task,  —  to  say  nothing  of  constructing  well- 
ordered  tariffs,  keeping  straight  accounts,  and  providing  ade- 
quate funds  for  growth.  And  out  of  this  unsettled  condition  of 
affairs  there  had  sprung  the  usual  mushroom"  crop  of  specula- 
tion, fraud  and  corruption  which  is  bound  to  flourish  at  such 
times. 

And  then,  finally,  in  seeking  to  understand  the  economic 

situation  in  1887,  the  intolerable  arrogance  of  great  railway 

managers  must  be  kept  in  mind.     Honorable  exceptions  there 

must  have  been,  to  be  sure.     But  the  "Public  be  damned" 

1  Cf.  Hudson,  op.  cit.,  pp.  41-46.  2  Cf.  chap.  VIII. 

VOL.  1—29 


450  RAILROADS 

attitude  of  the  old  Commodore  Vanderbilt  was  evidently  a 
general,  although  perhaps  a  somewhat  exaggerated  one.  It  is 
certain  that  there  was  no  well-defined  sense  of  responsibility  to 
the  pubhc.  All  attempts  at  investigation  or  reform  were 
treated  as  "interference  with  private  business."  The  rising 
tide  of  popular  feeling  was  increased  by  evidence  of  corrupt 
political  practices,  as  well  as  of  mere  crude  contempt  for  the 
rights  of  patrons.  Read  the  congressional  debates  upon  the 
Camden  and  Amboy  monopoly  in  New  Jersey;  the  special  laws 
"jammed"  through  the  state  legislature  by  the  New  York 
Central  Railroad;  ^  and  the  revelations  as  to  corruption  in  the 
Credit  Mobilier  and  other  proceedings  in  Congress.^  Such 
things  added  fuel  to  the  flames  in  the  East,  kindled  and  kept 
alive  in  the  West  by  the  Granger  movement.  The  time  for  an 
attempt  to  curb  the  second  great  manifestation  of  corporate 
power  in  the  United  States  was  indeed  at  hand.  The  only 
question  was  as  to  the  form  which  it  should  assume. 

The  congressional  history  of  the  Act  of  1887  extends  over  a 
period  of  nearly  fifteen  years.  The  first  general  bill  to  pass 
the  House  of  Representatives  in  1874,  had  for  its  object  a 
reduction  of  rates;  but  the  movement  for  the  elimination  of 
discriminatory  practices  did  not  begin  until  two  years  later. 
Then  in  1877,  came  the  first  of  the  long  series  of  bills  which 
finally  led  up  to  the  statute  in  its  final  form,  prepared  by 
Representative  Reagan  of  Texas.  But  it  was  not  until  1884  that 
the  Senate,  ever  tardy  in  its  response  to  public  sentiment,  began 
to  take  the  matter  seriously.  Its  earlier  interest  in  reduced 
rates  had  dissipated,  ten  years  before,  with  the  Windom  Com- 
mittee Report.  Now,  however,  under  the  leadership  of  the 
Senator  from  Illinois,  the  Cullom  Committee  brought  in  a  bill, 
the  distinctive  feature  of  which  was  provision  for  a  permanent 

*  Chapters  of  Erie  reprinted  in  part  in  our  Railway  Problems. 
2  Cf.  Haney,  Congressional  History  of  Railways,  vol.  II,  p.  256.     The 
Credit  Mobiher  is  also  described  by  reprint  in  our  Railway  Problems. 


THE  ACT  OF   1SS7  451 

administrative  commission.  The  various  House  bills,  in  their 
distrust  of  executive  appointments  and  authority,  had  favored 
leaving  the  elimination  of  abuses,  once  clearly  defined  bj-^  law, 
to  the  Federal  courts.  A  legislative  deadlock  between  the  two 
chambers  resulted  upon  this  point;  as  well  as  concerning  the 
status  of  pooling.  For  the  House  sought  to  prohibit  all  traffic 
agreements;  while  the  Senate  would  permit  them  under  proper 
administrative  supervision. 

At  this  critical  juncture  the  Supreme  Court  decision  in  the 
Wabash,  St.  Louis,  and  Pacific  Railway  case  ^  was  handed 
down.  It  specifically  denied  to  the  individual  states,  power  to 
regulate  the  ever-increasing  volume  of  interstate  traffic.  This 
decision  put  the  match  to  the  long  train  of  influences  making 
for  action.  The  Senate  and  House  bills  were  therefore  taken 
up  in  conference  committee,  with  the  usual  outcome  of  give  and 
take.  The  Senate  gained  its  point  of  administrative,  rather 
than  judicial,  control.  A  commission  was  provided;  but  the 
courts  were  accorded  power  to  entertain  appeals.  On  the  other 
hand,  the  House  conferees  insisted  upon  the  prohibition  of 
pooling  and  a  more  stringent  long  and  short  haul  clause.  All 
were  agreed  in  respect  to  the  publicity  features.  The  series  of 
votes  at  different  times  with  steadily  growing  majorities, 
leading  up  finally  to  the  passage  of  this  compromise  statute  by 
both  houses,  is  significant  of  the  progress  of  public  opinion  upon 
the  matter. 

House  of  Representatives         Senate 

1874       Passed 

1877 
1884 
1886 
1887 

The  constitutionality  of  the  Act  to  Regulate  Commerce  of 
1887  need  not  long  concern  us.^     Everything  depended  upon 

1118U.  S.  557. 

2  CJ.  Cullom  Committee,  1,  pp.  28-40;  and  the  summary  of  Congres- 
sional debates  by  Haney,  op.  cit.,  vol.  II,  p.  231  et  seq. 


121  to  116 

— 

139  to  104 

— 

161  to  75 

43  to  12 

192  to  41 

47  to  4 

219  to  41 

37  to  12 

452  RAILROADS 

the  interpretation  of  the  clause  in  the  Constitution  conferring 
upon  Congress  power  over  commerce  with  foreign  nations  and 
among  the  states.  A  generation  earlier  the  regulation  of  rail- 
roads by  Federal  statute  might  not  have  been  sanctioned.  But 
Lincoln  and  Grant  had  dealt  a  death  blow  to  the  old  states' 
rights  idea.  And  the  positive  legislation  after  the  Civil  War 
prior  to  this  time,  had  already  denoted  a  much  more  progressive 
and  liberal  point  of  view.  The  far-reaching  decisions  of  the 
Supreme  Court  following  Munn  v.  Illinois  in  1876  had  clearly 
upheld  the  power  of  the  several  states  to  regulate  commerce. 
The  situation  called  only  for  definition  of  the  dividing  line  be- 
tween state  and  Federal  authority.  This  was  accorded  in  the 
Wabash  case,  which,  as  has  already  been  stated,  terminated  the 
congressional  deadlock,  and  brought  about  an  agreement  upon 
the  terms  of  the  law.  Nor  is  it  without  significance,  in  the  light 
of  subsequent  events,  that  the  Wabash  case  was  an  appeal  by  a 
common  carrier  to  Federal  authority  for  protection  against  a 
state  statute. 

A  brief  summary  of  the  main  provisions  of  the  Act  to 
Regulate  Commerce,  at  this  point,  will  be  convenient  for  future 
reference. 

Section  1.  It  applies  to  freight  and  passengers  by  land;  or  by 
land  and  water  in  cases  of  continuous  or  through  shipment,  even  to 
foreign  countries.  All  charges  shall  be  reasonable  and  just;  and  every 
unjust  and  unreasonable  charge  is  prohibited. 

Section  2.  Rebates  and  personal  discrimination  of  every  sort 
forbidden. 

Section  3.  Local  discrimination  forbidden;  equal  facilities  for 
interchange  of  traffic  with  connecting  lines  prescribed. 

Section  4.  Long  and  short  haul  clause:  "That  it  shall  be  unlawful 
for  any  common  carrier  subject  to  the  provisions  of  this  act,  to  charge 
or  receive  any  greater  compensation  in  the  aggregate  for  the  transporta- 
tion of  passengers  or  of  like  kind  of  property,  under  substantially 
similar  circumstances  and  conditions,  for  a  shorter  than  for  a  longer 
distance  over  the  same  line,  in  the  same  direction,  the  shorter  being 
included  within  the  longer  distance;  but  this  shall  not  be  construed 
as  authorizing  any  common  carrier  within  the  terms  of  this  act  to 
charge  and  receive  as  great  compensation  for  a  shorter  as  for  a  longer 


THE  ACT  OF  1887  453 

distajice:  Provided,  hoivever,  That  upon  application  to  the  Commission 
appointed  under  the  provisions  of  this  act,  such  common  carrier  may, 
in  special  cases,  after  investigation  by  the  Commission,  be  authorized 
to  charge  less  for  longer  than  for  shorter  distances  for  the  transporta- 
tion of  passengers  or  property;  and  the  Commission  may  from  time 
to  time  prescribe  the  extent  to  which  such  designated  conunon  carrier 
may  be  relieved  from  the  operation  of  this  section  of  this  act." 

Section  5.     All  pooling  and  traffic  agreements  prohibited. 

Section  6.  All  rates  and  fares  to  be  printed  and  posted  for  public 
inspection  at  all  stations;  and  filed  with  the  Commission  at  Wasliing- 
ton.  No  advance  in  rates  except  after  ten  days  notice.  All  charges, 
other  than  as  published,  forbidden. 

Section  9.  Procedure  by  complaint  before  the  Commission  or 
Federal  courts.  Power  to  compel  testimony  and  production  of 
papers. 

Section  10.     Penaltj^  of  $5000  for  each  offence  in  \aolation. 
(Amended  in  1889,  adcUng  imprisomnent.) 

Section  11.  Interstate  Coirunerce  Commission  of  five  members 
established;   by  Presidential  appointment;   term  six  years. 

Section  12.  Powers  of  Commission  to  inquire,  with  right  to  obtain 
fuU  information  necessary  to  exercise  of  its  authority.  Power  over 
witnesses  and  production  of  papers,  to  be  sustained  by  U.  S.  Circuit 
Courts. 

Sections  13-14.  Procedure  before  Commission  by  complaint. 
Parties  competent  to  appear.  Decisions  to  include  fincUngs  of  fact 
upon  which  based,  for  courts  on  appeal. 

Section  15.  Duty  of  Commission  to  notify  carriers  to  "cease  and 
desist"  from  violation,  or  to  make  reparation  for  injury  done. 

Section  16.  To  enforce  obedience,  procedure  by  petition  of 
Commission  in  Federal  courts,  which  may  issue  writs. 

Section  20.  Annual  detailed  reports  from  carriers  as  to  finance, 
operation,  rates  or  regulations  in  prescribed  forms  as  desired  by  the 
Commission. 

Such  is  the  substance  of  the  statute  which  marks  the  real 
beginning  of  subjection  of  the  railroads  to  control  by  the  Federal 
government.  It  was  avowedly  tentative  in  character.  It  was 
a  compromise,  entirely  satisfactory  to  no  one.  Many  of  its 
provisions  were  not  new.  Administrative  commissions  had 
already  been  in  existence  some  time  in  several  of  the  states. 
Pooling  had  also  commonly  been  condemned.  The  long  and 
short  haul  clause  in  the  statute  constitutes  no  innovation.  It 
was  based  specifically  upon  a  number  of  state  laws,  more  or  less 


454  RAILROADS 

similar  to  it  in  tenor. ^  In  Vermont,  for  example,  since  1850; 
in  Virginia,  since  1867;  and  in  Massachusetts,  since  1874, 
long  and  short  haul  clauses  had  been  in  force.  Some  seventeen 
states,  prior  to  the  enactment  of  the  Interstate  Commerce  Act 
in  1887,  had  conceded  the  wisdom  of  such  an  adjustment  be- 
tween local  and  long  hauls.  Nor  were  such  statutes  disregarded, 
as  a  rule.  Thus,  in  Massachusetts  they  were  enforced  to  the 
extreme  degree  of  prohibiting  any  concession  in  rates  at  Prov- 
incetown,  on  the  point  of  Cape  Cod,  one  hundred  and  twenty 
miles  from  Boston  by  land,  while  only  thirty-six  miles  in  a 
direct  line  by  water,  below  the  rates  at  any  of  the  intermediate 
points  on  the  roundabout  rail  line  along  the  Cape.  The  de- 
bates in  Congress  at  the  time  this  section  of  the  Act  was  under 
discussion  show  that  the  bill  as  finally  passed  was  a  compro- 
mise between  an  absolutely  inflexible  prohibition,  in  the  House, 
and  a  more  elastic  measure,  providing  for  exceptions,  in  the 
Senate. 

In  one  respect  the  law  of  1887  marks  a  profound  revolution 
in  both  commercial  theory  and  practice.  Its  provisions  con- 
cerning equality  of  rates  to  all  classes  of  shippers  denote  a  great 
moral  uplift  in  the  business  standards  of  the  country.  Prior 
to  this  time  the  English  common  law,  while  requiring  reason- 
ableness of  charges  by  common  carriers,  by  no  means  insured 
that  such  charges  should  be  stable  and  uniform.  This  flowed 
perhaps  from  the  circumstance  that  rebating  was  an  essentially 
American  abuse.  Neither  in  England,  nor  on  the  continent 
for  that  matter,  had  business  rivals  ever  made  such  use  of  the 
services  of  carriers  to  suppress  fair  competition  in  trade.  With 
us,  on  the  other  hand,  in  the  early  free-and-easy  days,  entire 
freedom  of  contract  between  shipper  and  carrier  had  been  the 
rule.  Published  tariffs  were  only  the  starting  point  for  "higgle " 
and  "dicker."  It  was  not  bad  form  for  a  shipper  to  "go 
shopping"  freely  among  the  freight  agents  of  competing  lines. 
The  location  of  new  enterprises,  new  opportunities  for  the 
»21  I.C.C.  Rep.,  340. 


THE  ACT  OF   1887  455 

expansion  of  old  ones,  were  all  more  or  less  conditioned  by  the 
special  favors  which  were  so  readily  obtainable  on  demand. 
Nor  was  the  accompaniment  of  secrecy  necessarily  due  to  fear 
of  moral  condemnation  by  the  commmiity.  Secrecy  was  an 
economic  essential  of  the  device,  as  has  elsewhere  been  showTi.^ 
By  this  new  statute  all  was  suddenly  changed.  Rebating  was 
made  a  crime,  punishable  as  such.  Is  it  any  wonder  that, 
almost  from  the  outset  and  for  nearly  fifteen  years,  this  part  of 
the  law  was  the  storm  centre  of  litigation;  and  that  in  respect 
of  rebating,  the  need  of  supplementary  legislation  should 
fiirst  become  apparent? 

1  Chapter  XX. 


CHAPTER  XIV 

1887-1905.     EMASCULATION   OF   THE   LAW 

Favorable  reception,  456.  —  First  resistance  from  unwilling  witnesses 
concerning  rebates,  457.  —  Counselman  and  Brown  cases,  458.  — 
The  Brimson  case,  459.  —  Relation  to  Federal  Courts  unsatisfactory, 
460.  —  Interminable  delay,  461.  —  Original  evidence  rejected,  461. — 
The  Commission's  court  record  examined,  462.  —  Rate  orders  at  first 
obeyed,  467.  —  The  Social  Circle  case,  468.  —  Final  breakdown  in 
Maximum  (Cincinnati)  Freight  Rate  case,  469.  —  Other  functions 
remaining,  472.  —  The  long  and  short  haul  clause  interpreted,  474.  — 
The  Louisville  and  Nashville  case,  474.  —  The  "independent  line" 
decision,  476.  —  The  Social  Circle  case  again,  478. —  "Rare  and 
pecuhar  cases,"  479.  —  The  Alabama  Midland  (Troy)  decision,  481.  — 
Attempted  rejuvenation  of  the  long  and  short  haul  clause,  483.  — 
The  Savannah  Naval  Stores  case,  484.  —  The  dwindhng  record  of 
complaints,  485. 

The  first  response  to  the  new  Federal  law  by  the  railroads 
was  entirely  favorable.^  They  sought  to  obey  its  mandates 
both  in  letter  and  spirit.  The  Commission  reports  in  1888 
that  the  railroads  "conformed  promptly"  to  their  orders; 
although  in  the  South  and  West  they  were  ''moving  more 
slowly."  On  the  other  hand,  the  new  Commission  under  the 
leadership  of  Judge  Cooley,  an  able  jurist  trusted  by  all  parties 
concerned,  was  equally  conciliatory  in  spirit.  Many  desirable 
changes  were  brought  about  in  railway  practice.  Attempts 
were  made  to  remodel  tariffs  all  over  the  country,  particularly 
in  the  East,  to  conform  to  the  long  and  short  haul  clause.^ 

The  immediate  effect  of  acquiescence  in  Section  4  was  to 
compel,  in  many  parts  of  the  country,  a  reduction  of  the  local 
rates  in  order  to  reduce  them  below  the  rates  charged  to  terminal 
and  competitive  points.     Thus,  for  example,  throughout  trunk 

1  Cf.  Simon  Sterne,  Railways  in  the  United  States,  1912. 

2  Cf.  Appendix  C,  Int.  Com.  Com.  Annual  Report,  1890. 


EMASCULATION  OF  THE  LAW  457 

line  territory,  they  were  almost  uniformly  adjusted  to  meet 
this  requirement.  Even  in  the  southern  states,  where  in  some 
quarters  the  most  persistent  opposition  to  the  law  has  from  the 
first  existed,  there  was  a  patent  disposition  shown  to  recognize 
the  justice  of  such  legislation.  The  Southern  Railroad  modified 
its  tariff  all  along  the  line  as  far  as  Atlanta,  although  it  claimed 
inability  to  make  changes  beyond  that  point.  For  nearly 
three  years,  in  fact,  the  carriers  conformed  in  an  increasing 
degree  to  this  requirement  of  the  law.^  A  sincere  effort  toward 
uniform  classification  of  freight,  with  substantial  results  in  the 
direction  of  simplification  of  schedules,  extended  over  several 
years.  Many  pools  were  disbanded;  all  were  reorganized  in 
conformity  with  the  statute.  And  in  the  matter  of  uniformity 
and  publicity  of  statistical  returns,  friendly  cooperation 
between  the  railroads  and  the  Commission,  brought  about  great 
improvements  in  accounting  practice.  No  considerable  popular 
interest  in  the  new  commercial  tribunal,  to  be  sure,  is  indicated 
by  the  volume  of  its  business.  After  five  years  experience, 
only  thirty-nine  formal  complaints  were  filed  in  1892.  But 
this  may  have  been  due  in  part  to  the  natural  hesitancy  of  ship- 
pers to  antagonizing  the  roads  by  coming  out  into  the  open  with 
their  grievances.  Or,  perhaps,  it  was  merely  because  the 
people  at  large  were  as  yet  quite  unfamiliar  with  the  law  and 
with  the  ease  of  procedure  under  it. 

The  earliest  intimation  of  determined  resistance  by  the 
carriers  came  in  comiection  with  prosecutions  for  rebating  in 
1890.  This  abuse  was  still  widely  prevalent.  The  Commis- 
sion complained  in  that  year  of  the  "general  disregard"  of 
the  law  aganibu  personal  discrimination;  and  set  out  to  prose- 
cute with  vigor.  But  witnesses  called  upon  to  testify  before 
grand  juries  as  to  such  practices,  proved  recalcitrant. ^  Cor- 
porations could  be  made  amenable  to  the  law  only  through  the 
instrumentality  of  persons  in  their  employ.     And  guilt  in  such 

^  Cf.  Brief  of  Counsel  for  Int..  Com.  Com.  in  the  Danville  case,  p.  88. 
2  C/.  account  in  Yale  Review,  1907,  pp.  119-155. 


458  RAILROADS 

matters  could  be  detected  only  by  the  testimony  of  those  who 
had  directly  witnessed,  or  participated  in,  the  unlawful  acts 
themselves.  As  one  writer  has  put  it,  "Rebate  contracts  are 
not  usually  negotiated  before  large  audiences  nor  are  rebate 
payments  commonly  made  upon  street  corners.  An  essential 
element  in  these  practices,  quite  aside  from  their  legality,  is  the 
secrecy  with  which  they  are  conducted."  It  soon  became 
apparent  that  unless  this  mantle  of  secrecy  could  be  stripped  off 
in  preliminary  proceedings,  not  even  indictments  could  be  had, 
—  to  say  nothing  of  the  proof  needed  for  subsequent  conviction. 
The  first  gromid  for  contesting  the  right  of  the  government 
to  extort  testimony  from  unwilling  witnesses  arose,  oddly 
enough,  from  an  amendment  of  the  law  intended  to  increase  its 
effectiveness.  Originally  punishable  only  by  heavy  fine,  on 
recommendation  of  the  Commission,  Congress  added  in  1889  an 
amendment  whereby  departure  from  the  published  rate  was 
made  punishable  also  by  imprisonment.  By  this  change 
criminal,  as  well  as  civil,  procedure  was  thus  brought  into  play. 
The  amendment,  moreover,  extended  the  punishment  to  ship- 
pers; the  railroad  official  who  gave  rebates  having  alone  been 
liable  hitherto.  An  unexpected  result  speedily  followed.  In 
1890  one  Counselman,  a  shipper,  questioned  concerning  his 
enjoyment  of  less  than  the  open  rate  upon  grain,  declined  to 
answer,  taking  refuge  under  the  Fifth  Amendment  to  the 
Constitution  of  the  United  States.  This  declared  that  "no 
person  .  .  .  shall  be  compelled  in  any  criminal  case  to  be  a 
witness  against  himself."  The  witness  persisted  in  his  refusal 
to  testify  even  before  a  district  judge:  and  the  case  went  on 
appeal  through  the  Circuit  Court  which  decided  in  favor  of 
the  Commission,  up  to  the  Supreme  Court  of  the  United  States. 
This  tribunal  in  1892  held  that  the  Revised  Statutes  of  the 
United  States  which  for  twenty-five  years  had  been  held  to 
protect  the  constitutional  rights  of  witnesses  when  called  upon 
to  give  testimony,  against  criminal  proceedings  based  upon 
such  evidence,  did  not  in  fact  adequately  afford  such  protec- 


EMASCULATION  OF  THE  LAW  459 

tion.  Counselman  was  ordered  discharged  from  the  custody 
of  the  United  States  Marshal.  It  was  held,  furthermore, 
''that  a  statutory  enactment  to  be  valid,  must  afford  absolute 
immunity  for  the  offence  to  which  the  question  relates."  ^ 
Congress  promptly  passed  a  law  to  this  effect  in  the  follow- 
ing year.  The  matter  did  not,  however,  rest  here.  The  valid- 
ity of  this  later  statute  had  now  to  be  upheld.  And,  with 
discouraging  defeat  in  1894  in  an  Illinois  Circuit  Court,  the 
issue  had  to  be  raised  again  a  year  later  elsewhere,  to  be  then 
carried  on  appeal  a  second  time  to  the  Supreme  Court.  This 
took  place  in  the  so-called  Brown  case.  -  The  final  outcome  in 
1896  was  a  complete  denial  of  the  right  of  witnesses  to  with- 
hold material  testimony.  But  it  required  six  years  of  liti- 
gation to  bring  about  the  desired  result. 

During  the  pendency  of  the  proceedings  above  described, 
a  second  line  of  resistance  to  the  govermnent  developed.  Not 
the  merely  negative  personal  right  of  witnesses  to  withhold 
testimony,  but  the  positive  legal  authority  of  the  Commission 
to  exact  it,  was  called  in  question.  This  struck  at  the  very 
roots  of  all  procedure.  For  it  challenged  the  validity  of  the 
Act  itself.  In  how  far  might  an  administrative  body,  inde- 
pendently, have  power,  hitherto  resident  alone  in  the  courts  and 
Congress,  to  compel  the  attendance  and  testimony  of  witnesses 
as  well  as  the  production  of  papers?  Section  12  of  the  Act  was 
evidently  intended  to  confer  such  powers  as  were  possessed 
and  might  be  delegated  by  the  Congress.  But  then  there  was 
the  Constitution  again  to  be  considered!  Certain  witnesses 
declined  to  produce  books  and  answer  questions  in  1892.  One 
Brimson  was  selected  for  a  test  case.  The  first  decision  by  the 
Circuit  Court  held  these  sections  of  the  statute  to  be  uncon- 
stitutional on  the  ground  that  ''Congress  cannot  make  the 
judicial  department  the  mere  adjunct  or  instrument  of  the 
other  departments."  But  the  Supreme  Court  of  the  United 
States  in  1894  reversed  this  judgment;  and,  unreservedly, 
1  142  U.  S.,  547.  2  Brown  v.  Walker,  161  U.  S.,  591. 


/ 


460  RAILROADS 

although  by  a  bare  majority  opinion,  affirmed  the  constitu- 
tionahty  of  the  procedure  under  the  Act.^  This  Brimson 
opinion,  together  with  the  Brown  decision  two  years  later, 
were  confidently  beheved  to  have  so  strengthened  the  arm  of 
the  government  that  rebating  might  at  last  be  eliminated. 
But,  as  will  shortly  appear,  an  entirely  new  law  was  yet 
needed  to  eradicate  the  evil.  For  the  moment,  however,  the 
right  of  Congress  to  legislate  and  of  the  Commission  to  act, 
had  been  upheld. 

The  relation  of  the  Interstate  Commerce  Commission  as  an 
administrative  body  to  the  Federal  courts  under  the  provisions 
of  the  Act  of  1887,  proved  unsatisfactory  from  the  first.  In 
order  to  understand  the  situation,  it  may  be  well  to  review 
the  ordinary  procedure.  Formal  complaint  having  been  filed,  the 
Commission  heard  the  case  and  promulgated  its  decision  in  the 
form  of  an  order  to  the  carriers.  If  they  chose  to  comply  with 
it,  well  and  good.  Otherwise,  the  Commission  must  apply  to  a 
Federal  court  for  the  issuance  of  a  judicial  writ  to  compel 
obedience  to  the  order.  Thereupon  the  court  proceeded  to 
review  the  case;  and  upon  the  findings  to  issue  an  order  of  its 
own.  From  this  order,  however,  appeal  might  be  taken  even 
up  to  the  Supreme  Court.  Then,  and  then  only,  did  the  original 
mandate  of  the  Commission  have  the  force  of  law.  Practically, 
two  results  followed,  as  shown  by  the  experience  of  the  succeed- 
ing years.  There  was  intolerable  delay  in  the  redress  of  griev- 
ances; and,  in  the  second  place,  all  definitive  proceedings  were 
postponed  until  the  case  had  gone  on  appeal  to  the  courts. 
In  other  words  the  Commission  instead  of  being  a  coordinate 
body  with  the  courts,  was  reduced  to  an  entirely  subordinate 
position.  Its  function  became  merely  to  institute  proceedings, 
and  thereafter  to  appear  as  a  complainant  before  other  tribunals 
competent  alone  to  decide  the  case.  Intolerable  delay  in 
procedure   was   the   constant   complaint   of   shippers.     Years 

1 154  U.  S.,  447. 


EMASCULATION  OF  THE  LAW  461 

elapsed  before  final  judgments  were  rendered.  The  average 
duration  of  cases  appealed  was  not  less  than  four  years.  Some- 
times they  extended  over  twice  that  period.  Often,  as  in  the 
Charleston,  S.  C,  case  in  1898,  several  years  elapsed  before 
the  Commission  itself  rendered  a  decision.  Knotty  cases  were 
sidetracked. 

But  the  main  source  of  delay  was  in  the  carriage  of  cases  on 
appeal  up  to  the  Supreme  Court  of  the  United  States.  They 
had  to  await  their  turn  in  regular  order,  being  giveii  no  priority 
on  the  crowded  dockets.  The  Social  Circle  and  Import  Rate 
cases,  soon  to  be  discussed,  consumed  five  years  in  litigation, 
even  after  the  Commission  had  rendered  its  opinion.  The 
Florida  Fruit  Exchange  case  involving  rates  on  oranges,  origi- 
nally decided  by  the  Commission  in  1891,  was  for  six  years 
thereafter  before  the  Federal  Courts.  The  Georgia  Railroad 
Commission  cases  were  not  settled  for  nine  years.  Nor  did 
the  tedious  process  end  here.  After  the  judicial  review,  which 
usually  covered  the  law  points,  the  entire  question  had  to  be 
remanded  to  the  Commission  for  a  new  order  in  conformity 
with  the  findings  of  the  court.  After  nine  years  of  litigation 
in  the  Chattanooga  case,  back  it  went  to  the  Commission  to  be 
re-tried  after  consideration  of  other  commercial  factors.  First 
decided  in  1892,  it  was  reopened  in  1904. ^  Is  it  any  wonder  that 
the  number  of  formal  proceedings  instituted  on  complaint  of  ship- 
pers steadily  dwindled  year  by  year?  In  1901  only  nineteen  peti- 
tions were  filed.    Business  of  this  sort  was  almost  at  a  standstill. 

A  second  unsatisfactory  feature  of  the  relations  of  the 
Commission  to  the  courts,  lay  in  the  refusal  of  the  latter  to 
accept  the  evidence  taken  before  the  Commission  in  the  original 
proceedings  as  final.  Trouble  began  in  1888  on  the  first  appeal, 
known  as  the  Kentucky  and  Indiana  Bridge  case.^     The  court 

'  The  history  of  these  cases  up  to  1900  will  be  found  in  56th  Congress, 
1st  session,  Senate  Document  319.  Five  years  later  they  were  more  fully 
treated  in  Hearings  before  the  Senate  (Elkins)  Committee  on  Interstate 
Commerce,  1905,  vol.  V,  Appendix  F,  part  2,  pp.  709-780. 

-  37  Federal  Reporter,  567. 


462  RAILROADS 

treated  it  as  an  original  proceeding,  even  as  to  questions  of 
fact;  and  proceeded  to  consider  it  de  novo.  This  of  course 
involved  a  duplication  of  all  expenses;  which,  in  causes  suffi- 
ciently important  to  appeal,  were  very  heavy.  Ten. volumes  of 
tyi3ewritten  testimony,  each  as  large  as  the  Congressional 
Record,  were  taken,  for  instance,  in  the  San  Bernardino  case.^ 
Both  shipper  and  railroad,  therefore,  commonly  came  to  regard 
the  proceedings  before  the  Commission  as  merely  a  necessary 
formality  to  be  observed  prior  to  the  conclusive  adjudication  of 
the  matter  by  the  courts.  This  placed  the  Commission  in  a 
most  awkward  predicament.  It  was  compelled  by  law  to 
render  a  decision  upon  an  entirely  imperfect  presentation  of 
facts.  And  this  decision  was  thereafter  liable  to  be  reviewed 
upon  the  basis  of  entirely  new  testimony.  Thus  in  the  leading 
Alabama  Midland  case,  involving  the  reasonableness  of  rates 
to  Troy,  Alabama,  as  compared  with  adjacent  towns,  much 
depended  upon  the  existence  of  effective  competition  with  the 
railroads  from  boat  lines  on  the  rivers  at  other  places.^  Be- 
fore the  Commission  the  evidence  adduced  by  the  carriers 
dwelt  upon  the  navigability  of  the  Chattahoochee  river  as  com- 
pelling lower  rates  at  Columbus  and  Eufaula  than  at  Troy,  an 
inland  town.  Yet,  when  the  case  was  really  opened  up  in 
appeal  proceedings,  it  appeared  that  this  magnificent  waterway 
was  really  dry  about  half  the  year ;  that  the  channel  was  never 
deeper  than  three  feet;  and  that  boats  were  at  all  times  of  the 
year  "embarrassed  by  the  overhanging  trees."  How  could 
the  Commission  be  expected  to  pass  upon  vital  questions  wisely 
under  such  circumstances?  Wliether  wilfully  done  or  not,  — 
and  evidence  is  not  lacking  of  a  deliberate  policy  adopted  in 
some  cases,  —  the  inevitable  effect  was  to  bring  the  Commission 
and  the  law  itself  into  discredit.  So  accentuated  did  this  evil 
become,  that  in  the  Social  Circle  case  the  Supreme  Court  dis- 
tinctly discountenanced  the  practice,  declaring  it  to  be  the 

1  149  U.  S.,  264.  2  (y_  pp.  399^  supra,  and  481,  infra;  reprinted 

in  full  in  our  Railway  Problems. 


EMASCULATION  OF  THE  LAW  463 

intention  of  the  law  that  all  material  facts  should  be  disclosed 
in  the  original  proceedings.^  But  it  was  not  until  1906  that 
the  mode  of  procedure  on  appeal  was  by  statute  clearly  defined. 
In  the  meantime  public  interest  in  the  work  of  the  Commission 
was  bound  to  wane. 

In  this  connection  it  may  not  be  out  of  place  to  refer  to  the 
persistent  use  made  of  the  record  of  the  Commission  in  court 
proceedings  under  these  adverse  circumstances,  as  a  plausible 
argument  by  the  railroads  in  later  years  against  any  augmenta- 
tion of  its  powers.  One  brief,  for  example,  recites  that  "since 
1887,  forty-three  suits  have  been  instituted  to  enforce  final 
orders  of  the  Commission  as  to  rates.  The  net  result  of  the 
action  of  the  courts  shows  two  affirmances  and  thirty  reversals." 
It  continues  later,  "as  over  ninety  per  cent,  of  the  Commission's 
orders  as  to  rates  which  have  gone  before  the  courts  have  been 
over-ruled,  it  is  impossible  to  foretell  what  havoc  would  follow 
from  the  exercise  of  such  powers."  This  statement  is  entirely 
true,  but  it  is  not  the  entire  truth.  We  may  profitably  consider 
the  cases  of  sufficient  importance  to  have  been  passed  upon  by 
the  Supreme  Court  of  the  United  States.  Between  1887  and 
1905,  sixteen  such  decisions  were  rendered  on  cases  appealed 
for  enforcement  by  the  Interstate  Commerce  Commission. 
Fifteen  of  these  were  decided  in  favor  of  the  carriers,  while  only 
one  sustained  in  part  the  contention  of  the  Commission.  At 
first  sight,  this  record  certainly  appears  to  warrant  the  con- 
demnation of  the  Commission.  A  body  so  persistently  on  the 
wrong  side  of  great  questions  as  this  record  indicates,  would 
surely  invite  distrust.  There  were  two  answers  to  this  conten- 
tion, however,  which  merit  consideration  before  a  final  judgment 
can  be  rendered.  One  of  these  was  the  irregularity  of  procedure, 
above  described.  The  other  was  that  these  court  cases  had 
nearly  all  involved,  not  so  much  the  administrative  application 
of  the  law  to  economic  abuses,  as  the  purely  judicial  interpreta- 
tion of  the  law  itself. 

1 162  U.  S.,  184. 


464  RAILROADS 

Only  by  means  of  concrete  cases  decided  by  the  Commission 
as  an  administrative  body,  could  the  scope  and  meaning  of  the 
original  law  be  determined.  This  was  a  most  difficult  task 
hinging  upon  the  utmost  legal  technicalities  and  refinements. 
Even  the  most  learned  judges  failed  to  agree  among  themselves. 
Thus  in  eight  of  the  sixteen  cases  above  mentioned,  the  decisions 
in  the  lower  Federal  courts  failed  of  agreement  with  the  final 
decree  of  the  Supreme  Court.  In  the  Cartage  case,  —  involving 
the  legality  of  a  railway  giving  one  shipper  free  cartage  of  goods 
to  a  railway  station  as  an  inducement  to  ship  over  its  line, 
while  withholding  the  privilege  from  another, —the  Commission 
was  sustained  in  the  Circuit  Court  and  reversed  in  the  two  higher 
tribunals.  In  other  instances,  like  the  Social  Circle  case,  — 
turning  upon  the  discrimination  in  freight  rates  against  small 
towns  in  favor  of  large  competitive  centres,  —  the  first  court 
ruled  adversely,  while  the  Circuit  Court  of  Appeals  and  the 
Supreme  Court  sustained  the  Commission  in  part.  Or  yet 
again,  as  in  the  Chattanooga  case,  —  wherein  this  city  com- 
plained against  a  higher  freight  rate  from  New  York  than  the 
rival  city  of  Nashville  enjoyed,  although  the  goods  for  Nashville 
passed  through  Chattanooga  and  were  hauled  one  hundred 
and  fifty-one  miles  further,  —  both  lower  tribunals  sustained 
the  Commission  only  to  be  finally  overruled  by  the  Supreme 
Court.  The  fact  that  in  only  eight  of  these  most  important 
cases  the  courts  could  agree  among  themselves  indicates  the 
nicety  of  the  legal  issues  comprehended.  All  parties  were  in 
fact  working  much  in  the  dark,  both  as  to  the  intention  of  the 
original  law  and  as  to  the  possible  effects  of  its  interpretation. 
The  charge  of  incompetence,  if  it  held  good  for  the  Commission, 
applied  equally  well  to  a  large  number  of  the  most  learned 
judges  in  the  Federal  courts. 

Another  indication  of  the  extreme  delicacy  of  the  legal  issues 
involved,  is  found  in  the  lack  of  unanimity  even  among  the 
justices  of  the  Supreme  Court,  itself.  In  nine  of  the  sixteen 
Supreme  Court  cases  the  final  decision  was  not  rendered  without 


EMASCULATION  OF  THE  LAW  465 

dissent.  As  the  lower  courts  were  divided  among  themselves, 
so  the  justices  of  the  Supreme  Court  were  apparently  somewhat 
at  sea.  The  minority,  to  be  sure,  was  small,  in  most  cases  being 
due  to  the  failure  of  Justice  Harlan  to  concur.  But  in  the  far- 
reaching  Import  Rates  case,^  the  court  was  more  evenly  divided. 
The  issue  raised,  concerned  the  legality  of  lower  through  rates 
on  imports  from  Liverpool  to  San  Francisco  via  New  Orleans, 
than  were  granted  on  domestic  shipments  from  New  Orleans  to 
the  same  destination.  Thus  the  rate  on  books,  buttons,  and 
hosiery,  from  Liverpool  to  San  Francisco  through  New  Orleans 
was  $L07  per  hundred  pounds.  At  the  same  time  the  domestic 
shipper  was  compelled  to  pay  $2.88,  or  two  and  one-half  times 
as  much,  for  a  haul  from  New  Orleans  to  San  Francisco  alone. 
In  another  important  instance,  tin  plate  was  carried  from  Liver- 
pool by  steamer  and  rail  through  Philadelphia  to  Chicago  for 
twenty-four  cents  per  hundred  pounds.  For  the  American 
merchant  in  Philadelphia  the  rate  to  the  same  market  was 
twenty-six  cents.  For  the  inland  haul  alone  the  Pennsylvania 
Railroad  was  receiving  sixteen  cents  on  the  foreign  goods,  while 
coincidently  charging  American  merchants  ten  cents  more  for 
the  same  service.  Discrimination  against  the  American  mer- 
chant in  favor  of  foreign  competition,  not  infrequently  more 
than  sufficient  to  overbalance  any  supposed  protection  afforded 
by  the  tariff,  has  been  repeatedly  proved  in  such  cases  as  this. 
The  duty  on  imported  cement  was  eight  cents  per  hmidred- 
weight.  In  one  instance,  this  duty  with  the  total  freight  rate 
added  amounted  to  only  eighteen  cents,  as  against  a  rate  of 
twenty  cents  for  the  domestic  producer  from  New  York  to  the 
same  point.  There  were  reasons  for  this  grievous  discrimination 
against  the  domestic  shipper,  mainly  concerned  with  the 
vagaries  of  ocean  freight  rates.  Steamers  must  have  ballast 
for  the  return  trip  to  equalize  out-going  shipments  of  grain  and 

1  162  U.  S.,  197.  Late  data  as  to  the  extent  of  the  practice  are  in 
App.  V,  Digest,  Hearings  (Senate)  Committee  on  Interstate  Commerce, 
1905,  pp.  1-29.     Cf.  also  p.  406,  supra. 

VOL.  1—30 


466  RAILROADS 

other  exports,  and  they  will  carry  heavy  commodities,  such  as 
salt,    cement,    crockery,   and   glass,   at   extremely   low   rates. 
Nevertheless,  such  imported  commodities  can  be  sold  to  ad- 
vantage in  competition  with  domestic  goods  only  when  the  rail- 
ways will  contribute  equally  low  rates  to  complete  the  shipment. 
The   Interstate   Commerce   Commission   in   these   Import 
Rate  cases  originally  held  that  such  discriminations  were  un- 
lawful.    Two  appellate  courts,  in  turn,  sustained  this  view. 
Finally,  however,  the  Supreme  Court  decided,  with  three  mem- 
bers, including  the  Chief  Justice,  dissenting,  that  the  Inter- 
state Commerce  Law  as  phrased  did  not  ex-pressly  prohibit  the 
practice.     Everything  turned  upon  the  interpretation  of  certain 
clauses  in  the  law.     No  question  was  ever  raised  as  to  the 
economic  issues  involved,  nor  was  it  competent  to  these  tri- 
bunals to  pass  upon  such  issues.     The  question  was  simply  and 
solely  this:   Wlien  the  Act  to  Regulate  Commerce  forbade  in- 
equahty  or  cUscrimination  between  shippers,  did  it  contemplate 
competition  between  shipments  originating  within  the  country 
and  others  from  foreign  ports?     Was  the  Interstate  Commerce 
Commission,  in  other  words,  empowered,  in  interpreting  this 
act,  to  consider  circumstances  and  conditions  without  as  well  as 
within  the  boundaries  of  the  United  States?     If  it  was  entitled 
to  consider  solely  domestic  conditions,  it  was  certainly  right  and 
economically  sound  in  forl^idding  such  practices;    if,  on  the 
other  hand,  it  was  required  to  take  account  of  commercial  con- 
ditions the  world  over,   irrespective  of  the  effect  upon  the 
domestic  producer  and  internal  trade,  its  decision  should  have 
been  favorable  to  the  railroads.     To  appreciate  fully  the  ex- 
treme nicety  of  the  legal  points  involved  and  the  delicacy  of 
the  economic  interests  at  issue,  one  must  needs  read  the  ex- 
tended opinions  both  of  the  majority  of  the  Supreme  Court 
and  of  the  three  dissenting  justices,  including  Chief  Justice 
Fuller.     But  to  interpret  the  reversal  of  the  original  decision  of 
the  Interstate  Commerce  Commission  by  this  tribunal  as  in 
the  slightest  degree  involving  incompetence  or  judicial  unfair- 


EMASCULATION  OF  THE  LAW  467 

ness  is  a  misrepresentation  of  all  the  facts  involved.  As  in 
the  preceding  cases  touching  the  interpretation  of  the  long 
and  short  haul  clause,  it  may  fairly  be  said  that  the  consensus 
of  opinion  among  business  men,  and  certainly  among  the  pro- 
fessional economists  of  the  country,  was  on  the  side  of  the  Com- 
mission in  condemning  such  practices.  As  to  the  law,  that  was 
decided  otherwise  by  a  narrow  majority. 

The  final  breakdown  of  the  law  of  1887  came,  however,  not 
from  mere  defects  in  procedure,  but  from  the  adverse  construc- 
tion placed  by  the  Supreme  Court  of  the  United  States  upon  its 
fundamental  clauses,  viz.,  those  concerning  the  exercise  of 
rate-making  power  by  the  Commission.  Whether  or  not  it 
was  the  intention  of  Congress  to  delegate  such  power,  seems 
not  to  have  been  considered  for  some  years.  At  all  events, 
within  two  months  after  the  law  was  passed  the  Commission 
certainly  interpreted  the  law  as  giving  it,  not  only  power  to 
investigate  but  to  prescribe  remedies  for  what  it  conceived  to 
be  unreasonable  charges.  The  right  to  exercise  general  rate- 
making  power  in  first  instance  was  distinctly  disclaimed.^ 
But  the  right  to  prescribe  a  modification  of  existing  rates  on 
complaint  was  repeatedly  affirmed,  without  question  either  by 
the  carriers  or  the  Federal  courts.^  The  first  order  of  the  com- 
mission in  Evans  vs.  The  Oregon  Navigation  Company  directed 
a  reduction  of  the  rate  on  wheat  from  Walla  Walla,  Wash- 
ington, to  Portland,  Ore.,  from  thirty  to  twenty- three  and 
one-half  cents.  It  was  promptly  complied  wdth.  Then  came 
the  Farmington-Red  Wing,  Minn.,  wheat  case,  touching  not 
absolute  but  relative  rates  between  two  competing  places. 
The  order  that  the  charge  to  one  town  should  not  exceed  that  to 
the  other  by  more  than  one-third  was  likewise  obeyed.  Even 
freight  classification,  not  specifically  mentioned  in  the  Act, 
was  supposed  to  be  fully  subject  to  the  Commission's  control. 

'  Delaware  and  Hudson  Canal  case;   1  I.C.C.  Rep.,  152. 
2  Hearings  before  Committee  on  Interstate  Commerce,  U.  S.  Senate, 
Feb.  15,  1900  and  May  18,  1905,  vol.  IV,  pp.  2866  and  2880. 


468  RAILROADS 

In  the  Reynolds  case,  railroad  ties  and  lumber  were  ordered  to 
be  grouped  together,  without  contest.  The  activity  of  the 
Commission  at  this  time  in  promoting  uniform  classification 
elsewhere  discussed,^  was  evidently  based  upon  a  similar  belief 
in  its  legal  competency  to  act.  For  nearly  a  decade  attention 
seems  to  have  been  so  concentrated  upon  matters  of  judicial 
procedure,  that  this  more  fundamental  proposition  was  neg- 
lected. Moreover,  all  this  time  was  needed  to  secure  a  final 
pronouncement  from  the  Supreme  Court,  which  was  alone 
competent  to  settle  it  as  a  matter  of  law. 

It  was  not,  then,  until  almost  ten  years  after  the  institution 
of  the  Commission,  in  fact,  that  its  rate-making  power  was  de- 
nied. The  first  shadow  of  doubt  seems  to  have  been  expressed 
in  the  decision  of  the  Supreme  Court  in  the  so-called  Social 
Circle  case.^  This  involved  the  reasonableness  of  rates  from 
Cincinnati  to  the  town  of  Social  Circle,  Georgia,  as  related  to 
the  rates  to  Atlanta  and  Augusta  on  either  side.  Disregarding 
other  phases  of  the  case  which  concerned  the  interpretation  of 
the  long  and  short  haul  clause,  the  Commission  had,  when  the 
case  was  first  decided  in  1891,  ordered  a  reduction  of  the  rate 
from  Cincinnati  to  Atlanta  from  SI. 09  to  $1  per  hundred 
pounds.  This  case  was  carried  to  the  Supreme  Court,  where 
decision  was  finally  rendered  in  1896.  Purely  as  an  obiter 
dictum  the  court  discussed  briefly  the  interpretation  of  the 
original  act  in  respect  to  rate-making  power.  It  expressed  a 
reasonable  doubt  in  the  premises,  even  going  further  and  con- 
fessing inabihty  to  find  any  provision  of  the  act  "that  expressly 
or  by  necessary  implication  confers  such  powers."  It  does  not 
seem  clear  whether  by  this  statement  the  court  had  reference 
to  the  arbitrary  prescription  of  rates  in  first  instance  to  the 
carriers,  or  merely  to  action  of  the  Commission  in  prescribing 
rates  after  complaint,  in  order  to  redress  grievances. 

Several  decisions  of  circuit  courts  during  1896  reenforced 
the  judicial  doubt  as  to  the  validity  of  the  rate-making  power 

»  Chapter  IX,  supra.  ^  162  U.  S.,  184:  4  I.C.C.  Rep.,  744. 


EMASCULATION  OF  THE  LAW  469 

of  the  Commission.  Thus,  for  example,  in  the  case  of  Coxe 
Brothers,^  involving  rates  upon  anthracite  coal,  which,  by  the 
way,  had  been  pending  since  1891,  the  Circuit  Court  of  Appeals 
expressly  declined  to  enforce  an  order  of  the  Commission,  stat- 
ing that  it  ''is  not  clothed  with  the  power  to  fix  rates  which 
it  undertook  to  exercise  in  this  case."  The  court's  reasoning 
in  the  Social  Circle  case  was  followed  and  expressly  cited. 
During  the  same  year,  1896,  other  cases,  such  as  that  of  the 
Truck  Farmers'  Association,  were  decided  in  the  same  spirit. 
The  final  adjudication  of  this  point,  however,  was  reserved  for 
the  decision  in  the  so-called  Cincinnati  Freight  Bureau  case. 
This  had  its  origin  in  an  application  from  the  Commission  to 
enforce  an  order  issued  in  1894  against  the  Cincinnati,  New 
Orleans  and  Texas  Pacific  Railroad  Company.-  The  case 
involved  the  adjustment  of  rates  from  eastern  and  western 
centres,  respectively,  into  the  southern  states;  and  the  Com- 
mission had  decided  that  a  reduction  of  the  rates  from  the 
western  cities  was  reasonable  and  necessary.  This  leading 
case,  also  known  as  the  Maximum  Freight  Rate  decision  of 
1897,  is  characterized  by  the  Commission  itself  as  perhaps  "the 
most  important  since  the  enactment  of  the  Act  to  Regulate 
Commerce."     It  merits  consideration  in  some  detail. 

The  reasoning  in  the  Maximum  Freight  Rate  case  ^  cannot 
be  better  put  than  by  the  following  excerpts  from  the  opinion 
of  the  Supreme  Court. 

"Jt  is  one  thing  to  inqure  whether  the  rates  which  have  been 
charged  and  collected  are  reasonable,  —  that  is  a  judicial  act;  but  an 
entirely  different  thing  to  prescribe  rates  which  shall  be  charged  in  the 
future,  —  that  is  a  legislative  act. 

************ 

"We  have,  therefore,  these  considerations  presented:  First.  The 
power  to  prescribe  a  tariff  of  rates  for  carriage  by  a  common  carrier  is  a 

1  32  Federal  Reporter,  1002.  2  Chapter  VII,  supra. 

'  4  Int.  Com.  Rep.,  592:  167  U.  S.,  479.  Both  the  original  opinion  and 
final  decision  with  a  map  are  in  our  Railway  Problems.  C/.  also,  p.  248, 
supra.  The  case  revived  in  1910  is  in  18  I.C.C.  Rep.,  440.  Vide  p.  588, 
infra. 


470  RAILROADS 

legislative,  and  not  an  administrative  or  judicial,  function,  and,  having 
respect  to  the  large  amount  of  property  invested  in  railroads,  the 
various  companies  engaged  therein,  the  thousands  of  miles  of  road, 
and  the  millions  of  tons  of  freight  carried,  the  varying  and  diverse 
conditions  attaching  to  such  carriage,  is  a  power  of  supreme  dehcacy 
and  importance.  Second.  That  Congress  has  transferred  such  a 
power  to  any  administrative  body  is  not  to  be  presumed  or  implied 
from  any  doubtful  and  uncertain  language.  The  words  and  phrases 
efficacious  to  make  such  a  delegation  of  power  are  well  understood,  and 
have  been  frequently  used,  and,  if  Congress  has  intended  to  gi-ant  such 
a  power  to  the  Interstate  Commerce  Commission,  it  cannot  be  doubted 
that  it  would  have  used  language  open  to  no  misconstruction,  but 
clear  and  direct.  Third.  Incorporating  into  a  statute  the  common- 
law  obligation  resting  upon  the  carrier  to  make  aU  its  charges  reasonable 
and  just,  and  directing  the  conamission  to  execute  and  enforce  the  pro- 
^-isions  of  the  act,  does  not  by  implication  carry  to  the  commission,  or 
invest  it  with  the  power  to  exercise,  the  legislative  function  of  ])re- 
scribing  rates  which  shall  control  in  the  future.  Fourth.  Beyond  the 
inference  wliich  irresistilDly  follows  from  the  omission  to  grant  in  express 
terms  to  the  commission  this  power  of  fixing  rates  is  the  clear  language 
of  section  6,  recognizing  the  right  of  the  carrier  to  establish  rates,  to 
increase  or  reduce  them,  and  prescribing  the  conditions  upon  which 
such  increase  or  reduction  may  be  made,  and  requiring,  as  the  only 
conditions  of  its  action  —  First,  pubUcation;  and.  Second,  the  filing 
of  the  tariff  with  the  commission.  The  grant  to  the  commission  of 
the  power  to  prescribe  the  form  of  the  schedules,  and  to  direct  the 
place  and  manner  of  publication  of  joint  rates,  thus  specifying  the 
scope  and  limit  of  its  functions  in  this  respect,  strengthens  the  con- 
clusion that  the  power  to  prescribe  rates  or  fix  any  tariff  for  the  future 
is  not  among  the  powers  granted  to  the  commission. 

"These  considerations  convince  us  that  under  the  interstate  com- 
merce act  the  commission  has  no  power  to  prescribe  the  tariff  of  rates 
which  shall  control  in  the  future,  and  therefore  cannot  invoke  a  judg- 
ment in  mandamus  from  the  courts  to  enforce  any  such  tariff  by  it 
prescribed." 

The  immediate  effect  of  this  decision  was  to  put  an  end  to 
any  enforcement  of  decisions  relative  to  rates  by  the  Com- 
mission. The  carriers  immediately  refused  to  obey  any  orders 
which  the  Commission  issued  for  the  redress  of  grievances. 
This  policy  was  manifested  with  increasing  clearness  during  the 
five  years  subsequent  to  the  decision.  It  became  more  and 
more  certain  that  the  denial  of  the  right,  not  only  to  pass  upon 


EMASCULATION   OF  THE  LAW  471 

the  reasonableness  of  a  particular  rate,  but  to  prescribe  what 
rate  should  supersede  it,  meant  the  abolition  of  all  control 
whatever  over  the  scale  of  charges.  The  entire  inadequacy  of 
making  rate  regulation  dependent  upon  the  mere  determination 
of  rates  as  applied  i7i  the  past,  without  reference  to  the  rates 
which  should  prevail  ?n  the  future,  was  apparent  on  all  sides. 
More  than  this,  all  remedy  for  the  parties  who  had  borne  the 
burden  of  an  unreasonable  rate  would  seem  to  have  been  re- 
moved. This  was  clearlj^  described  in  the  report  of  the  Com- 
mission for  1897.  It  was  illustrated  by  the  rates  upon  oranges. 
In  1890  there  had  been  a  sudden  advance  on  rates  from  Florida 
to  New  York  from  thirty  to  forty  cents.  The  Commission 
after  investigation  ordered  that  the  rate  be  reduced  to  thirty- 
five  cents.  As  a  matter  of  fact,  how  could  this  action  redress 
grievances  of  those  who  had  already  paid  forty  cents  per  box? 
It  was  difficult  in  the  first  place  to  discover  v\'ho  bore  the  burden 
of  the  unreasonable  charge;  and  in  the  second  place  it  was 
certain  that  some  of  those  who  suffered  could  not  legally  sue  in 
court.  The  actual  shipper  who  alone  could  sue  for  repajmient 
of  unreasonable  charges  was  a  middleman  who  recouped  himself 
in  any  event,  either  from  the  grower,  the  consumer,  or  both. 
He  lost  nothing  by  reason  of  the  unreasonable  rate.  As  a 
matter  of  fact,  not  any  single  individual  but  the  locality,  had 
been  mulcted  by  five  cents  per  hundred  pounds,  supposing  that 
a  rate  of  forty  cents  were  unreasonable.  Experience  showed 
that  almost  no  shippers  or  other  parties  injured,  actually  at- 
tempted to  secure  the  restitution  of  moneys  already  paid  for 
unreasonable  charges.  In  only  five  out  of  225  cases  down  to 
1897  was  a  refund  actually  sought;  and  in  those  cases  $100  was 
the  maximum  sought  to  be  recovered.  As  a  matter  of  fact  the 
damage  inflicted  by  the  existence  of  such  an  unreasonable  rate 
could  not  be  measured  hj  hundreds  or  perhaps  by  hundreds  of 
thousands  of  dollars.  The  bearing  of  this  citation  is  to  show 
that  any  effectual  protection  to  the  shipper  must  proceed  from 
adjudication  of  the  reasonableness  of  rates  before,  and  not  after, 


472  RAILROADS 

they  have  been  paid;  that  is  to  say,  in  advance  of  their  exac- 
tion by  the  carrier.  Power  to  pass  upon  the  reasonableness  of 
such  rates  prior  to  their  enforcement,  as  a  consequence,  con- 
stitutes practically  the  only  safeguard  which  the  shipping  public 
may  enjoy.  It  will  be  observed  that  in  this  discussion  refer- 
ence is  made  simply  and  solely  to  that  class  of  cases  where 
complaint  is  made  against  the  unreasonableness  of  a  rate  per 
se  as  applied  to  all  shippers  alike,  entirely  distinct  from  the 
exercise  of  powers  by  the  Commission  in  respect  of  unreason- 
able discrimination  as  between  two  or  more  persons  or  places. 
That  other  question  of  relative  rates  was  to  come  up  in  another 
connection. 

Despite  this  denial  by  the  Maximum  Freight  Rate  decision 
of  power  to  prescribe  future  rates,  in  substitution  for  others  held 
to  be  unreasonable,  there  were  still  certain  things  which  the 
Commission  might  do  in  the  matter  of  rate  determination. 
The  only  question  was  as  to  whether  they  afforded  an  adequate 
remedy  for  the  redress  of  grievances.  Were  they  really  worth 
while?  Complaint  as  to  a  rate,  once  paid,  might  still  be  made. 
The  Commission  might  still  hold  it  mireasonable;  and  even 
pass  upon  the  degree  of  its  unreasonableness.  And  the  com- 
plainant shipper  might  then  institute  proceedings  for  repay- 
ment of  the  excessive  charges  under  that  particular  rate.  But 
the  difference  between  this  range  of  powers  and  those  which  had 
been  claimed  by  the  Commission  for  ten  years  was  simply  this : 
That  under  the  original  interpretation  of  the  law  the  Com- 
mission had  not  only  decided  whether  rates  were  wrong;  it  had 
also  prescribed  a  remedy  by  issuing  an  order  as  to  what  rates 
were  right,  believing  that  these  would  be  enforced  by  the  courts. 
Not  even  the  power  to  prescribe  maximum  rates  remained  to 
the  Commission  after  this  interpretation.  The  only  action 
open  to  it  would  be  to  declare  one  rate  after  another  unreason- 
able until  the  carriers  had  been  brought  to  terms.  Its  in- 
adequacy as  a  practical  remedy  was  the  main  factor  in  bringing 
about  the  passage  of  the  new  law  of  1906. 


EMASCULATION  OF  THE  LAW  473 

It  must  not  be  assumed  that  the  Supreme  Court  in  the 
Maximum  Freight  Rate  decision  intended  to  render  the  Com- 
mission an  entirely  superfluous  body.  But  its  functions,  as  set 
forth  in  the  following  quotation  from  the  opinion,  proclaimed 
the  adoption  of  an  entirely  different  policy  concerning  pubUc 
control  of  rates  from  the  one  hitherto  pursued.  Whether  it 
was  adequate  for  the  purpose  in  view  will  appear,  as  has  just 
been  observed,  from  the  subsequent  course  of  events. 

"But  has  the  commission  no  functions  to  perform  in  respect  to  the 
matter  of  rates,  no  power  to  make  any  inquiry  in  respect  thereto? 
Unquestionably  it  has,  and  most  important  duties  in  respect  to  this 
matter.  It  is  charged  with  the  general  duty  of  inquiring  as  to  the 
management  of  the  business  of  raihoad  companies,  and  to  keep  itself 
informed  as  to  the  mamier  in  which  the  same  is  conducted,  and  has 
the  right  to  compel  complete  and  full  information  as  to  the  manner  in 
which  such  carriers  are  transacting  their  business.  And,  with  this 
knowledge,  it  is  charged  with  the  duty  of  seeing  that  there  is  no  viola- 
tion of  the  long  and  short  haul  clause;  that  there  is  no  discrimination 
between  indi\adual  shippers,  and  that  notliing  is  done,  by  rebate  or 
any  other  de\'ice,  to  give  preference  to  one  as  against  another;  that 
no  undue  preferences  are  given  to  one  place  or  places  or  individual  or 
class  of  individuals,  but  that  in  all  things  that  equality  of  right,  wliich 
is  the  great  pm-pose  of  the  interstate  commerce  act,  shall  be  secured 
to  all  shippers.  It  must  also  see  that  that  publicity  which  is  required 
by  section  6  is  observed  by  the  railroad  companies.  Holding  the  rail- 
road companies  to  strict  compliance  with  aU  these  statutory  provisions, 
and  enforcing  obedience  to  all  these  provisions,  tends  ...  to  both 
reasonableness  and  equality  of  rate,  as  contemplated  by  the  interstate 
commerce  act." 

The  nadir  of  government  regulation  for  the  time  being  was 
reached  in  November,  1897,  —  six  months  after  the  Maximum 
Freight  Rate  decision.  A  second  opinion  from  the  Supreme 
Court  of  the  United  States  in  the  Alabama  Midland  (Troy) 
case,  with  one  blow  practically  nullified  the  long  and  short  haul 
clause.^     The  first  opinion  had  put  an  end  to  control  over  the 

1  The  Congressional  history  of  Section  4,  is  in  Haney,  op.  cit.,  p.  304; 
especially  good  in  Brief  for  Appellees,  by  Ed.  Baxter  in  the  Alabama  Mid- 
land Case,  U.  S.  Sup.  Court,  Oct.  term,  1896,  No.  563,  p.  98.  All  the 
leading  English  cases  are  reprinted  (Gov.  Printing  Office)  in  "Extracts  from 
the  Parliamentary  Papers  relating  to  the  Long  and  Short  Haul  Clause," 


474  RA.ILROADS 

reasonableness  of  rates  in  and  of  themselves.  This  second  one 
denied  the  right  to  establish  their  reasonableness  relatively  as 
between  competing  places  or  markets.  In  order  fully  to  ap- 
preciate the  significance  of  this  decision  it  will  be  necessary  to 
review  cursorily  the  tedious  litigation  which  led  up  to  this 
result,  —  the  entire  emasculation  of  the  Fourth  section.  The 
final  outcome  may  be  best  described  by  Justice  Harlan  in  his 
dissenting  opinion  in  this  leading  case : 

"Taken  in  connection  with  other  decisions  defining  the  powers 
of  the  Interstate  Commerce  Commission,  the  present  decision,  it  seems 
to  me,  goes  far  to  make  that  commission  a  useless  body  for  all  practical 
purposes,  and  to  defeat  many  of  the  important  objects  designed  to  be 
accomplished  by  the  various  enactments  of  Congress  relating  to  inter- 
state commerce.  The  Commission  was  established  to  protect  the 
public  against  the  improper  practices  of  transportation  companies 
engaged  in  commerce  among  the  several  States.  It  has  been  left,  it 
is  true,  with  power  to  make  reports,  and  to  issue  protests.  But  it 
has  been  shorn,  by  judicial  interpretation,  of  authority  to  do  anything 
of  an  effective  character." 

The  interpretation  of  the  long  and  short  haul  clause  ^  as 
applied  to  concrete  cases  by  the  Interstate  Commerce  Com- 
mission, was  first  enunciated  in  the  decision  known  as  the 
Louisville  &  Nashville  case.^  ImmecUately  after  the  enact- 
ment of  the  law,  a  multitude  of  petitions  were  received  from 
carriers  all  over  the  country  praying  that  they  be  exempted 

1895,  pp.  1-83;  with  an  "Analysis  of  American  Cases"  (National  Pub- 
lishing Co.,  Washington),  1895,  pp.  1-39;  both  issued  in  connection  with 
the  C,  N.  O.  and  T.  P.  case,  U.  S.  Sup.  Court,  Nos.  729  and  832.  The 
compUcated  legal  history  is  best  detailed  step  by  step  in  Annual  Reports 
of  the  Commission;  references  are  in  Judson  on  Interstate  Commerce. 
App.  F,  part  II  (Elkins),  Senate  Committee  Hearings,  1905,  pp.  65-130, 
gives  a  garbled  outline,  convenient  for  citations.  21  I.C.C.  Rep.,  p.  405, 
summarizes  well.  Several  of  the  leading  cases  are  reprinted  in  our  Railway 
Problems,  as  indicated  by  footnotes  hereafter. 

1  For  a  few  pages,  I  follow  closely  the  line  of  my  report  on  the  subject 
for  the  U.  S.  Industrial  Commission  in  1900. 

2 1  I.C.C.  Rep.  31;  First  Annual  Report,  Int.  Com.  Com.;  also  Digest 
(Elkins)  Committee,  1905.  To  be  distinguished  from  the  Supreme  Court 
decision  affirming  the  validity  of  the  Kentucky  long  and  short  haul 
clause,  183  U.  S.,  503. 


EMASCULATION   OF  THE  LAW  475 

from  the  operation  of  this  clause,  which  prohibited  a  greater 
charge  for  a  lesser  haul  than  for  one  over  the  same  line  between 
points  more  distant.  The  policy  outhned  in  the  Louisville  & 
Nashville  case,  delivered  by  Judge  Cooley,  has  practically 
remained  unchanged  to  the  present  time.  This  railroad  com- 
pany operating  a  line  parallel  to  the  Mississippi,  as  well  as 
intersected  at  various  points  by  its  tributary  rivers,  claimed 
that  the  existence  of  water  competition  compelled  a  rate  to  all 
competitive  points,  lower  than  rates  which  could  be  made  to 
local  and  intermediate  stations.  It  alleged  that  an  adjustment 
of  its  local  rates  to  the  low  level  necessitated  at  competitive 
points,  would  prove  disastrous  from  the  point  of  view  of  revenue. 
The  point  at  issue  was  as  to  the  interpretation  of  the  phrase 
"under  substantially  similar  circumstances  and  conditions"; 
which,  in  the  words  of  the  Act,  was  necessary  in  order  that  the 
prohibition  of  the  lesser  charge  for  the  longer  haul  should  be- 
come operative.  Without  entering  into  the  details  of  this 
decision,  in  the  course  of  which  the  nature  of  railroad  competi- 
tion and  of  rate  making  were  fully  discussed,  as  well  as  the  legis- 
lative history  of  this  clause  of  the  Act,  it  will  suffice  to  note  the 
conclusions.  These  were;  firstly,  that  the  prohibition  against 
a  greater  charge  for  a  shorter  than  for  a  longer  distance  over 
the  same  line  in  the  same  direction,  the  shorter  being  included 
within  the  longer  distance,  was  limited  to  cases  in  which  the 
circumstances  and  conditions  were  substantially  similar; 
secondly,  that  carriers  might  judge  in  the  first  instance  as  to 
the  similarity  or  dissimilarity  of  circumstances;  but,  thirdly, 
that  this  judgment  was  not  final  but  was  subject  to  review  by 
the  Commission  and  the  courts.  Perhaps  the  most  important 
point,  however,  was  the  determination  of  the  conditions  which 
constituted  such  dissimilar  circumstances  and  conditions  as 
entitled  the  carrier  to  charge  less  for  the  longer  than  for  the 
shorter  haul.  These  conditions  were  the  existence  of  water 
competition;  the  existence  of  other  railroads  not  subject  to  the 
statute;  and  "rare  and  peculiar"  cases  of  competition  between 


476  RAILROADS 

railroads  which  were  subject  to  the  law.  The  Commission  also 
held  as  a  guiding  principle  in  the  interpretation  of  this  clause 
that  no  distinction  would  be  recognized  between  local  traffic 
and  so-called  through  business;  and  also  that  the  expense  to 
the  carrier  involved  would  not  be  recognized  as  a  factor  unless 
it  happened  to  come  under  the  case  already  cited  as  "rare  and 
peculiar."  Furthermore,  the  desire  to  encourage  manufac- 
tures or  to  build  up  business  or  trade  centres,  was  not  recog- 
nized as  a  competent  reason  for  claiming  exemption  from  the 
prohibition  in  the  Act. 

The  leading  decision  of  the  Interstate  Commerce  Com- 
mission, above  mentioned,  was  rendered  in  1887.  It  was  not 
until  October  of  1892  that  the  first  serious  interference  arose 
through  judicial  interpretation  in  the  United  States  Courts. 
The  first  was  the  so-called  "separate  and  independent  line" 
decision. '^  This  case  arose  respecting  a  suit  for  the  repayment 
of  .$225  as  over-charges  on  corn  shipped  by  one  Osborne  from 
Scranton,  Iowa,  to  Chicago.  It  was  claimed  that  the  charges 
were  unjust  and  unreasonable,  inasmuch  as  they  were  in  excess 
of  rates  charged  from  Blair,  Nebraska,  a  point  more  remote 
from  Chicago.  The  United  States  Circuit  Court  of  Appeals  at 
St.  Paul  reversed  the  decision  of  the  lower  court,  holding  that 
the  lesser  rate  from  Blair  with  which  the  Scranton  rate  had  been 
compared,  was  not  a  rate  to  Chicago,  but  part  of  an  agreed 
through  rate  to  New  York  and  other  eastern  points.  Under 
this  interpretation,  the  aggregate  charge  for  the  longer  distance 
from  Blair  to  New  York  was  not  less  than  the  charge  for  the 
shorter  distance  from  Scranton  to  Chicago.  To  this  point  the 
decision  was  in  conformity  with  the  previous  interpretation 
by  the  courts  and  the  Commission;  which  had  uniformly  held 
that  a  portion  of  a  joint  through  rate  cannot  be  compared 
with  local  or  individual  rates  in  the  determination  of  what 
constitutes  the  rate  for  the  shorter  or  the  longer  haul.  This 
decision  went  further,  however,  and  therein  profoundly  affected 
1  52  Federal  Reporter,  912;  Ann.  Rep.,  I.C.C,  1892,  p.  31. 


EMASCULATION  OF  THE  LAW  477 

the  subsequent  interpretation  of  the  law.  It  proceeded  to 
define  the  word  "line"  as  used  in  the  Act,  by  holding  that  the 
joint  line  formed  by  two  roads  is  wholly  independent  of  the 
two  lines  represented  by  the  several  roads  taken  separately  and 
apart.  Interpreted  in  this  way,  the  decision  held  furthermore 
that  the  total  joint  rate  over  two  roads,  not  being  over  the 
"same  line,"  might  for  anything  in  the  fourth  section  of  the 
Act,  not  only  be  as  low  but  even  lower  than  the  local  rate  of 
either.  The  effect  of  this  decision  was  obviously  to  permit  a 
railroad  to  engage  in  traffic  agreements  for  through  carriage 
of  freight;  and  by  so  doing,  legally  to  become  a  fine  separate 
and  independent  from  the  same  physical  property  when  en- 
gaged in  the  transportation  of  freight  over  its  own  line.  More- 
over, by  every  contract  for  through  carriage  of  freight  with 
different  carriers,  the  road  became  a  separate  and  independent 
line  in  the  eyes  of  the  law.  As  many  lines  could  exist  over  one 
set  of  rails  as  there  were  trafiic  agreements  for  through  haulage 
of  freight  between  its  terminal  points.^ 

The  apprehension  of  the  Interstate  Commerce  Commission 
that  this  interpretation  of  the  word  line  might  render  the 
Fourth  section  of  the  Act  inoperative,  was  realized  in  the  fol- 
lowing year.  Several  decisions  not  only  adopted  the  obiter 
dictum  of  the  Osborne  case,  above  described,  but  proceeded  to 
expand  upon  it.  Thus,  for  example,  in  the  Georgia  Federal 
Court,  a  case  arose  involving  rates  from  the  North  to  Atlanta 
as  compared  with  the  higher  rates  to  intermediate  points. 
The  court  held  that  trafiic  from  Cincinnati  to  Augusta  or  At- 
lanta was  carried  over  a  different  line  than  that  which  was  used 
for  transportation  to  points  intermediate  between  Atlanta  and 
Augusta;  inasmuch  as  the  several  carriers  agreeing  upon  the 
joint  rate  as  far  as  Atlanta  from  the  North,  were  different. 

1  The  significance  of  this  decision  is  fully  discussed  in  the  Sixth  and 
Seventh  Reports  of  the  Interstate  Commerce  Commission,  which  early  in 
1887  had  already  defined  the  word  "Une"  in  the  Central  Vermont  case, 
as  meaning  the  physical  Une,  and  not  mere  traffic  agreements  or  routing 
arrangements. 


478  RAILROADS 

Moreover  it  held  that  the  road  from  Atlanta  to  Augusta  being 
wholly  within  the  state  of  Georgia,  might  by  making  a  local 
rate  from  Atlanta  which  was  added  to  the  through  rate  into 
Atlanta,  constitute  itself  merely  a  state  road,  and  therefore  be 
exempted  from  the  prohibition  of  the  Act.  Thus  it  appeared, 
to  quote  from  the  report  of  the  Commission  for  1893,  "that  in 
addition  to  the  embarrassments  proposed  by  the  original  '  line ' 
decision,  the  very  jurisdiction  of  the  law  itself  is  invaded  by  the 
extension  of  the  line  theory  indulged  in  by  the  Georgia  Federal 
court." 

The  interpretation  put  upon  the  Fourth  section  of  the  Act 
by  the  decision  above  cited,  remained  in  force  and  largely 
nullified  application  of  the  Act  itself  until  1896.  The  next 
important  interpretation  came,  in  the  decision  by  the  Supreme 
Court  of  the  United  States  in  the  so-called  "Social  Circle" 
case.^  This  decision  fully  discussed  the  interpretation  placed 
upon  the  word  "line"  in  the  Act.  The  rates  involved  were 
those  on  buggies  from  Cincinnati,  Ohio,  to  Social  Circle,  a  local 
station  between  Augusta  and  Atlanta,  Georgia.  Following 
the  practice  of  the  carriers  for  some  years,  the  Georgia  Railroad 
Company,  which  alone  served  the  town  of  Social  Circle,  had 
requested  its  connections  at  Atlanta  not  to  name  through  rates 
to  that  place  or  any  other  local  station  on  its  road.  The 
Circuit  Court  following  the  line  of  argument  already  described, 
had  held  that  under  such  circumstances  the  Georgia  railroad 
was  only  a  local  carrier  and  not  a  party  to  a  joint  or  common 
arrangement,  which  would  make  it  subject  to  the  control  of 
the  Federal  Commission.  The  Supreme  Court  reversed  this 
opinion,  however;  and  held  that  when  goods  are  shipped  on  a 
through  bill  of  lading,  they  constitute  an  interstate  carriage 
subject  to  Federal  supervision  and  control.  The  court  held 
further  that  this  state  road  became  part  of  a  continuous  line, 
not  by  consolidation  with  other  companies,  but  by  a  traffic 
arrangement  for  continuous  carriage  or  shipment.  The  Supreme 
1  4  I.C.C.  Rep.,  744;   162  U.  S.,  184.     Vide,  also,  p.  468,  supra. 


EMASCULATION  OF  THE  LAW  479 

Court  interpreted  the  original  Osborne  decision  as  merely 
affirming  that  a  railroad  company  doing  business  in  one  state 
could  not  be  compelled  to  enter  into  any  agreement  with  con- 
necting carriers.  For  by  so  doing,  it  continued,  the  carrier 
might  be  deprived  of  its  rights  and  powers  to  make  rates  on  its 
own  road.  Viewed  in  this  way  a  carrier  might  agree  to  form  a 
continuous  line  for  carrying  foreign  freight  at  a  through  rate 
without  being  prevented  from  charging  ordinary  local  rates  for 
state  traffic.  Stripped  of  legal  verbiage,  this  interpretation  by 
the  Supreme  Court,  virtually  overruled  the  previous  decisions 
by  lower  courts,  and  rehabilitated  the  original  interpretation 
of  the  word  "line"  by  the  Commission;  namely,  that  when  a 
continuous  line  for  through  traffic  is  formed  by  several  railroads, 
the  roads  constituting  that  line  and  making  use  of  it  are  merely 
parts  of  one  through  route  and  are  not  separate  Imes.  In 
short,  not  being  able  to  constitute  themselves  as  separate  lines 
by  reason  of  traffic  contracts,  they  must  continue  to  conform 
their  through  charges  to  the  rates  which  they  have  made  upon 
local  business.  So  far  as  the  enforcement  of  the  Fourth  sec- 
tion was  concerned,  therefore,  developments  to  this  point  had 
upheld  the  law  as  originally  passed.^  It  remained,  however, 
for  a  separate  and  distinct  course  of  judicial  interpretation  to 
once  more  jeopardize  both  the  practical  operation  of  the  law 
and  the  power  of  the  Commission. 

Reverting  to  the  original  Louisville  &  Nashville  decision 
in  1887,  it  "^ill  appear  that  the  Commission  held  at  that  time 
that  competition  between  carriers  subject  to  the  Act,  did  not 
constitute  such  dissimilarity  of  circumstances  and  conditions 
as  would  justify  the  carriers  in  making  their  long  distance 
rates  lower  than  the  rates  between  intermediate  points.  The 
only  exception  recognized  at  that  time  was  to  be  found  in 
certain  "rare  and  peculiar"  cases.^     One  of  these  will  suffice 

^  Amendment  of  the  law  in  1910,  precluded  any  further  misunder- 
standing, also,  by  adding  the  word  "route."     P.  565,  infra. 

2  Discussed,  as  an  economic  proposition  in  chap.  VII,  supra.  Baxter's 
Brief  in  the  Troy  case,  p.  117,  proves  it  not  pecuUar. 


480  RAILROADS 

as  an  illustration.  There  are  two  routes  by  which  traffic  from 
Youngstown,  Ohio,  may  reach  the  East.  One  is  by  way  of 
Pittsburg  and  the  Pennsylvania  Railroad;  the  other  by  an  out- 
let to  the  north,  at  Ashtabula  upon  the  Lake  Shore  and  New 
York  Central  trunk  lines.  Between  Youngsto^vn,  Ohio,  and 
Pittsburg,  two  parallel  lines  exist,  each  having  an  interest  in 
forwarding  freight  to  the  East  by  the  two  routes  above  men- 
tioned. The  peculiarity  of  the  situation  is  that  competitive 
traffic  for  the  East  may  leave  Pittsburg  in  either  direction.  If 
it  goes  around  by  Youngstown,  that  place  becomes  an  inter- 
mediate point  between  Pittsburg  and  New  York.  If,  on  the 
other  hand,  it  goes  from  Pittsburg  directly  east,  Youngstown 
becomes  not  an  intermediate  point,  but  one  more  remote  than 
Pittsburg  from  New  York.  Inasmuch  as  the  Pennsylvania 
route  from  Pittsburg  is  the  shorter,  it  makes  the  rate.^  The 
other  roundabout  route  is  obliged  to  accede  to  this  compelled 
rate  or  lose  the  business.  The  result  is  that  the  smaller  indirect 
road  is  obliged  to  give  a  lower  rate  from  Pittsburg  round  by 
way  of  Youngstown  to  New  York  than  it  gives  to  Youngstown 
itself.  Any  other  course  of  action  would  deprive  it  of  any  par- 
ticipation in  Pittsburg  business.  Such,  then,  is  one  of  those 
"rare  and  peculiar"  cases  under  which  the  Commission  from 
the  first  recognized  the  necessity  of  exempting  carriers,  even 
where  all  are  subject  to  the  Act,  from  the  prohibition  of  charg- 
ing less  for  a  shorter  than  for  a  longer  haul  over  the  same  line. 
The  carriers  from  the  outset  had  made  a  determined  effort 
to  show  that  the  competition  of  carriers  among  themselves  was 
sufficient  to  produce  that  dissimilarity  of  circumstances  and 
conditions  which  would  justify  exemption  from  the  Act.  This 
contention  the  Commission  refused  to  recognize,  and  did  so 
particularly  in  the  important  decisions  of  1892  known  as  the 
Georgia  Railroad  Commission  cases.^    These  again,  like  the 

1  Which  hne  makes  the  rate?     Cf.  p.  255,  s^ipra. 

25  I.C.C.  Rep.,  324.     Decided  by  the  Supreme  Court  in  1901;    181 
U.  S.,  29;  after  the  Alabama  Midland  decision. 


ElVIASCULATION  OF  THE  LAW  481 

Maximum  Freight  Rate  case,  involved  rates  from  Cincimiati  to 
various  points  throughout  the  South;  and  had  reference  particu- 
larly to  the  prevalent  practice  of  granting  low  rates  to  certain 
important  centres  known  as  basing  points.  In  this  decision 
the  Commission  re-afhrmed  the  principles  set  forth  in  the 
Louisville  &  Nashville  case,  except  in  one  detail;  namely,  as 
to  whether  the  carriers  were  justified  in  deciding  for  themselves 
in  first  instance  whether  a  case  of  railroad  competition  was  of 
that  type  already  defined  as  "rare  and  peculiar"  which  would 
permit  exemption  from  the  long  and  short  haul  prohibition. 
Experience  of  five  years  had  shown  that  the  right  of  decision 
in  this  respect  had  led  to  manifold  abuses;  inasmuch  as  a 
strong  disposition  on  the  part  of  the  carriers  all  over  the  country 
was  shown  to  interpret  all  cases  of  railroad  competition,  however 
simple,  as  "rare  and  peculiar."  The  Commission,  therefore, 
proceeded  to  overrule  its  earlier  decision;  and  denied  the  right 
on  the  part  of  carriers  to  determine  for  themselves  as  to  what 
constituted  dissimilarity  of  circumstances  and  conditions, 
affirming  that  that  right  was  its  own. 

All  of  the  foregoing  judicial  interpretation  is  secondary  in 
importance  to  the  final  decision  of  the  United  States  Supreme 
Court  in  1897  in  what  is  known  as  the  Alabama  Midland  case.^ 
This  once  and  for  all  overruled  the  interpretation  placed  upon 
the  law  by  the  Commission,  that  railroad  competition  did  not 
constitute  that  dissimilarity  of  circumstances  and  conditions 
which  would  entitle  a  carrier  to  exemption  from  the  prohibitions 
of  the  statute.  This  case,  like  almost  all  the  others  involving 
the  interpretation  of  the  Fourth  section,  arose  upon  complaint 
of  a  small  town  in  the  southern  states  that  more  important  trade 
centres  were  securing  advantages  in  the  matter  of  rates  which 
were  denied  to  it.  The  Board  of  Trade  of  Troy,  Alabama, 
complained  that  it  was  compelled  to  pay  $3.22  a  ton  on  phos- 

1  6  I.C.C.  Rep.,  3;  overruled  by  the  Supreme  Court  in  168  U.  S.,  144. 
Both  reprinted  in  our  Railway  Problems.  Decisions  of  secondary  impor- 
tance down  to  1905  are  abbreviated  in  App.  F,  Senate  Elkins  Committee 
Hearings,  1905. 

VOL.  I — 31 


482 


RAILROADS 


phate  rock  from  Florida  and  South  Carolina  points,  whereas 
the  rate  to  Montgomery,  a  longer  distance,  was  only  $3.00  per 
ton.  The  rock  was  carried  through  Troy.  It  was  also  com- 
plained that  rates  on  cotton  discriminated  against  Troy  as 
compared  with  Montgomery  and  other  points;  and  that,  thirdly, 
rates  from  Baltimore  and  New  York  were  higher  to  Troy  than 
to  Montgomery,  which  was  fifty-two  miles  further  away.     The 


case  was  carried  on  appeal  to  the  Supreme  Court  of  the  United 
States,  where  an  opinion  was  handed  down  in  1896.  The  gist 
of  this  decision  was  that  competition,  whether  of  trade  centres 
or  of  railroads,  must  be  recognized  as  a  factor  in  the  determina- 
tion of  the  similarity  of  circumstances  and  conditions  under 
which  the  Fourth  section  of  the  clause  should  be  applied.  In 
other  words,  it  recited  that  Montgomery  being  a  larger  place 
than  Troy;  and  having  been  an  important  trade  centre  on  a 
navigable  river  for  many  years,  it  was  competent  to  the  rail- 
roads centering  at  Montgomery  to  determine  in  part  for  them- 


EMASCULATION  OF  THE  LAW  483 

selves  whether  the  existence  of  effective  competition  would 
warrant  them  ua  granting  lower  rates  to  Montgomery  than  to 
local  stations  hke  Troy.  The  court  held,  however,  that  such 
competition  was  oi^ly  one  of  the  elements  which  must  be  con- 
sidered. It  did  not  define  it  as  the  dominating  one.  The 
railroads,  nevertheless,  seized  upon  this  interpretation  of  the 
law  at  once,  making  use  of  it  to  justify  whatever  departm-e  they 
pleased  to  make  from  the  practice  originally  contemplated  in 
adjusting  long  and  short  haul  charges. 

After  the  discouraging  reverse  in  the  Alabama  Midland 
decision,  which  the  Commission  interpreted  to  mean  that  if 
circumstances  and  conditions  were  different  at  the  more  distant 
point,  that  fact,  of  itself,  removed  the  case  from  the  inhibition 
of  the  Fourth  section;  certain  inferior  Federal  court  opinions 
somewhat  modified  this  view.^  The  question  as  to  whether 
the  discrimination  at  bar  was  or  was  not  justifiable,  was  per- 
mitted to  be  considered;  in  addition  to  inquiring  merely  whether 
circumstances  and  conditions  were  different  at  the  more  dis- 
tant point.  The  Commission  somewhat  reanimated  by  these 
decisions,  sought  to  apply  this  judicial  modification  of  the 
Alabama  Midland  reasoning  to  several  then  pending  com- 
plaints as  to  local  discrimination.  Both  in  the  Danville  ^  and 
Hampton  cases  ^  the  carriers  were  ordered  to  desist  from  dis- 
criminating against  the  nearer  point  under  this  interpretation 
of  the  law.  But  the  Supreme  Court  put  an  end  to  it  all  by 
condemning  this  fine  of  reasoning  in  its  last  leading  decision 
upon  the  Fourth  section  rendered  in  1901,  finally  disposing  of 
the  so-called  Chattanooga  case.  This  dealt  the  final  death 
blow  to  the  long  and  short  clause.^    The  complaint  in  this  case 

1  21  I.C.C.  Rep.,  407.  Elkins  Committee  Digest.  Judson  on  Inter- 
state Commerce,  etc. 

2  Reprinted  in  our  Railway  Problems.  Sustained  by  the  lower  courts 
in  1903;   122  Fed.  Rep.,  800. 

3  8  I.C.C.  Rep.,  503;   120  Fed.  Rep.,  934. 

*  Facts  are  given  in  chap.  VII,  p. 228,  supra;  and  in  full  in  our  Railway 
Problems.  The  law  is  in  181  U.  S.,  1.  The  only  later  decisions,  not 
changing  the  law,  are  in  190  U.  S.,  273. 


484  RAILROADS 

arose  from  the  fact  that  freight  rates  to  Chattanooga,  Tennessee, 
from  eastern  cities  were  higher  than  to  Nashville,  although  the 
latter  was  the  more  distant  point.  The  Commission  found 
that  there  was  no  water  competition  at  Nashville  compelling 
the  lower  rate;  but  that  there  was  competition  of  railways  and 
of  markets.  The  Supreme  Court  reversed  the  Commission  in 
its  final  attempt  thus  to  revivify  the  moribund  Fourth  section, 
and  fully  confirmed  its  original  view  as  to  the  meaning  of  the 
Alabama  Midland  decision.  If  such  circumstances  and  con- 
ditions as  competition  of  markets  or  railways  at  the  two  points 
were  dissimilar,  carriers  might  without  restraint  depart  from 
the  long  and  short  haul  rule.  Thus  the  Fourth  section  of  the 
law  was  to  all  intents  and  purposes  repealed.  Complaint  after 
complaint  was  perforce  set  aside  by  the  Commission,  For 
practical  purposes  this  part  of  the  law  was  rendered  absolutely 
nugatory.  The  chapter  was  closed.  For  twenty  years,  in 
face  of  the  litigation  above  outlined,  no  order  of  the  Commission 
respecting  local  discrimination  was  enforced.  Only  with  its 
amendment  in  1910,  as  subsequently  described,^  did  the  long 
and  short  haul  clause  once  more  resume  its  due  importance 
upon  the  statute  books. 

One  special  case  may  be  cited  in  this  general  connection,  as 
typical  of  the  arbitrary  action  of  carriers  particularly  in  the 
South.  It  was  this  sort  of  thing  which  went  far  to  arouse 
public  opinion  and  focus  attention  upon  the  need  for  real 
regulation."  The  situation  appears  upon  the  accompanying 
map.  The  planters  in  a  certain  southern  territory  served  by 
the  Louisville  &  Nashville  railway  had  been  accustomed  to 
ship  out  their  cotton  to  the  North  bj^  various  routes.  It  might 
go  by  way  of  New  Orleans,  via  Pensacola,  up  the  main  line 
along  the  Mississippi  valley,  or  be  hauled  eastward  to  Savannah 
and  other  Atlantic  ports,  and  thence  go  by  vessel  to  New 

1  Pp.  564  and  601,  infra. 

2  Known  as  the  Savannah  Naval  Stores  case.  8  Int.  Com.  Rep., 
376.     It  is  reprinted  in  full  in  our  Railway  Problems. 


EMASCULATION  OF  THE  LAW 


485 


England.  Inasmuch  as  the  through  rate  was  the  same  by  all 
routes,  no  monetary  issue  to  the  planter  was  hivolved.  But  not 
so  to  the  railway.  For  by  the  first  routes  it  secured  a  long 
haul;  while  by  the  last  it  not  only  was  limited  to  short  carriage 
of  the  goods,  but  was  compelled  to  accept  an  even  smaller 
fraction  of  the  joint  through  rate.  In  this  case  the  Louisville 
&  Nashville  railway  —  which,  by  the  way,  more  persistently 
denied  the  existence  of  abuses  than  any  other  road  in  the 
country  —  advanced  the  Savannah  cotton  rate  arbitrarily  in 
1899  from  $2.75  to  S3.30  a  bale.     This  effectually  clammed  up 


the  eastern  outlet  and  jeopardized  the  interests  of  the  port  of 
Savannah  to  that  degree.  Doubtless  the  Louisville  &  Nash- 
ville was  not  oblivious  to  the  welfare  of  that  great  seaport. 
It  could  not  afford  to  be,  for  Savannah's  growth  must  indirectly 
accrue  to  its  benefit.  It  did  not  love  Savannah  less;  but  it 
loved  its  o\Am  particular  seaport,  Pensacola,  or  the  long  haul 
via  Louisville,  more.  Maybe  it  was  better  that  traffic  should 
go  out  this  way  —  who  knew  best?  The  real  point  to  be  made 
is  that  no  competent  tribunal  or  process  for  impartially  de- 
termining the  question  was  provided  by  the  now  emasculated 
law. 

The  work  of  the  Commission  during  these  discouraging 
years  was  naturally  affected  most  profoundly  by  these  luni- 
tations  placed  upon  its  activity  by  the  Federal  courts.  The 
number  of  formal  complaints,  never  large,  steadily  dwindled 


486 


RAILROADS 


year  by  year.  Thirty-nine  were  filed  in  1892;  but  in  1900  and 
the  following  year  only  nineteen  were  presented  annually.^ 
The  Commission  persisted  in  its  statistical  work  with  marked 
success.  Important  independent  investigations  continued  to 
be  made,  in  pursuance  of  the  only  policy  remaining  open  to  it, 
that  of  publicity.  But  even  the  informal  complaints,  repre- 
senting mainly  the  grievances  of  individual  shippers  rather 
than  of  competing  cities  or  commercial  bodies,  w^ere  few  in 
number,  as  the  following  official  figures  show. 


1898 

1899 

1900 

Total 

Informal  complaints: 

Settled  by  payment  of  amount  claimed   .  . 

18 
10* 
32 
16 
29 

5 

7 

30 

20 

14 

9 
12 
22 
31 
20 

32 
29 

Settled  in  other  ways         

84 

67 

Suggesting  formal  complaints 

63 

105 

76 

94 

275 

But  better  times  were  coming.  The  return  of  commercial 
prosperity  brought  with  it  new  problems.  Old  abuses,  quies- 
cent during  the  long  industrial  depression  of  1893-1897,  once 
more  made  their  appearance.  New  constructive  legislation 
followed,  based  as  before  upon  the  economic  needs  of  the  time, 
as  they  made  themselves  manifest;  but  a  great  campaign  of 
education,  led  by  the  vigorous  personaUty  of  Theodore  Roose- 
velt, was  necessary,  as  we  shall  see,  to  compel  Congress  to  act. 
1  CJ.  the  chart  at  p.  523,  infra. 


CHAPTER  XV 

THE   ELKINS   AMENDMENTS    (1903):    THE   HEPBURN   ACT 

OF    1906 

New  causes  of  unrest  in  1899,  487.  —  The  spread  of  consolidation,  487.  — 
The  rise  of  freight  rates,  488.  —  Concentration  of  financial  power,  490. 

—  The  new  "trusts,"  491.  —  The  Elkins  amendments  concerning 
rebates,  492.  —  Five  provisions  enumerated,  493. 

More  general  legislation  demanded,  494.  —  Congre.ssional  history  1903-1905, 
49-5.  —  Railway  publicity  campaign,  496.  —  President  Roosevelt's  leader- 
ship, 498.  —  The  Hepburn  law,  499.  —  Widened  scope,  499.  —  Rate- 
making  power  increased,  500.  —  Administrative  v.  judicial  regulation, 
501.  —  Objection  to  judicial  control,  503.  —  Final  form  of  the  law,  505. 

—  Broad  v.  narrow  court  re\'iew,  506.  —  An  unfortunate  compromise, 
507.  —  Old  rates  effective  pending  review,  508.  —  Provisions  for 
expedition,  511.  —  Details  concerning  rebates,  512.  —  The  commodity 
clause,  513.  —  History  of  its  provisions,  514.  —  Publicity  of  accounts, 
515.  —  Extreme  importance  of  accounting  supervision,  516.  —  The 
Hepburn  law  summarized,  520. 

The  new  incentives  to  rehabilitation  of  the  Interstate  Com- 
merce law  by  Congress,  becoming  year  by  year  more  insistent 
after  1899,  were  four  in  number.  Most  of  the  old  long-standing 
grievances  were  still  on  the  docket.  New  sources  of  dissatis- 
faction and  danger  were  now  added  in  plenty  as  a  result  of 
important  industrial  changes.  The  most  far-reaching  of  these 
was  the  spread  of  consolidation  among  railroads.  This,  as  we 
shall  see,^  led  within  a  few  years  to  a  partition  of  the  entire 
railway  net  of  the  country  into  a  few  large  systems,  each  con- 
trolled financiall}^,  although  seldom  by  actual  majority  in- 
vestment, by  powerful  individuals  or  banking  groups,  mainly 
located  in  New  York.  Many  small  local  roads,  long  closely 
identified  with  the  welfare  of  particular  communities,  were  now 
merged  in  great  systems  under  entirely  different  and  probably 
absentee  ownership  and  management.  Boston,  Baltimore, 
^  Exhaustively  described  in  volume  II. 


488  RAILROADS 

New  Orleans,  St.  Paul,  Cincinnati,  not  to  mention  a  host  of 
other  smaller  places,  seemed  commercially  cast  adrift.  The 
welfare  of  railroads  and  of  the  particular  communities  in  which 
they  lay,  —  long  supposed  to  be  indissolubly  linked  together, 
—  was  now  seen  by  concrete  experience  to  be  separable,  often ; 
into  conflicting  parts.  The  New  Haven  monopoly  in  New 
England  might  be  managed  rather  in  the  interest  of  New  York 
than  of  the  port  of  Boston.  The  Illinois  Central,  once  devoted 
whole-heartedly  to  the  upbuilding  of  New  Orleans,  must  now, 
as  a  part  of  the  Union  Pacific  system,  comprehend  San  Fran- 
cisco and  even  Savannah  'within  the  scope  of  its  plans.  New 
systems  implied  new  traffic  arrangements.  Railroad  policy 
must  of  necessity  involve  a  choice,  not  between  two  evils, 
perhaps,  but  between  a  resultant  good  and  a  necessarily  at- 
tendant evil.  All  these  corporate  changes  made  inevitably 
for  much  commercial  re-adjustment.  And  each  re-adjustment 
left  a  trail  of  real  or  alleged  grievances;  for  the  settlement  of 
which  no  competent  tribunal  existed.  There  can  be  no  doubt, 
therefore,  that  the  significant  changes  in  the  railroad  map 
after  1899  had  much  to  do  with  the  demand  for  new 
legislation. 

The  second  new  and  general  cause  of  dissatisfaction  among 
the  public  was  the  great  and  almost  continuous  rise  of  freight 
rates  which  began  about  1900.     This  was  of  course  a  direct 
outcome  of  the  spread  of  railroad  consolidation.     The  move- 
ment of  freight  rates  has  been  elsewhere  described  in  detail.^ 
It  has  appeared  that  the  steady  decline  which  ensued  for  almost 
a  generation  after  the  panic  of  1873,  was  sharply  reversed  when 
combination  succeeded  competition  as  a  fundamental  policy  of 
railroading.     This  striking  reversal  of  the  course  of  railway 
charges  was  not,  of  course,  an  isolated  phenomenon.     It  took 
place  in  a  period  of  marked  and  general  rise  of  prices,  not  un- 
connected with  changes  in  the  value  of  gold.     The  upward 
trend  was  at  first  more  striking,  and  apparentl}-  more  irresistible, 
1  Chapter  XII,  .vw/zra,  and  chai).  XVIII,  infra. 


THE  ROOSE\^LT  LEGISLATION  4S9 

in  the  charges  for  transportation  than  in  the  prices  of  commodi- 
ties. Prior  to  1899,  not  even  the  most  astute  railroad  managers 
ever  anticipated  any  such  change.  The  Boston  &  Mauie  Rail- 
road even  permitted  the  inclusion  of  a  prohibition  of  any 
higher  rates  in  future  than  were  then  in  force,  to  be  incorporated 
in  the  acts  of  the  New  Hampshire  legislature  authorizing  its 
leases  of  important  lines.  Attorneys  sought  to  prove  that 
railroads  were  not  subject  to  the  law  of  increasing  returns, 
because  it  was  inevitable  as  an  economic  law  that  with  growi:h 
in  the  volume  of  business,  rates  should  progressively  dechne.^ 
If  there  was  often  public  dissatisfaction  at  the  scale  of  charges 
under  these  conditions,  how  irresistible  might  the  unrest  among 
shippers  become  when  rates  actually  began  to  move  so  strongly 
upwards! 

A  single  illustration  of  the  class  of  complaints  thus  en- 
gendered may  not  be  out  of  place.-  It  concerned  the  reason- 
ableness of  an  increase  of  two  cents  per  hundred  pounds  on 
lumber  from  Georgia  points  to  the  Ohio  river.  From  1894  to 
1903  these  rates  had  been  already  raised  by  three  or  four  cents, 
to  a  level  of  thirteen  or  fourteen  cents;  so  that  prosperity  had 
been  abeady  discounted  by  a  rise  of  thirty  or  forty  per  cent. 
On  top  of  this,  and  despite  an  enormous  increase  in  the  tonnage, 
came  a  further  raise  of  two  cents  per  hundred  pounds  in  April, 
1903.  This  was  too  much.  To  this  exaction,  involving  not 
less  than  $132,000  per  year  additional  freight  rates,  the  lumber- 
men of  Georgia  objected.  The  Interstate  Commerce  Com- 
mission upheld  their  contention;  and  in  July,  1905,  more  than 
two  years  afterward,  the  Circuit  Court  sustained  the  Com- 
mission. Appeal  was  then  taken  to  the  Supreme  Court  which 
rendered  a  decision  in  1907,  more  than  four  years  after  the 
increase  had  occurred;    and  during  which  time  the  railroads 


1  Journal  of  Political  Economy,  VI,  1898,  pp.  457-475. 

2  Central  Yellow  Pine  Association,  etc.,  10  I.C.C.  Rep.,  505  and  549; 
206  U.  S.,  428.  Other  cases  dating  from  this  time  are  given  in  chap.  XVI 
as  they  reached  the  Supreme  Court. 


490  RAILROADS 

had  been  collecting  the  added  charge.  The  shippers  had  nat- 
urally at  once  shifted  the  burden  upon  the  public  so  far  as  the 
competition  of  other  lumber-producing  centres,  each  cham- 
pioned by  its  own  railroad  or  set  of  roads,  would  permit. 
No  recovery  of  this  tax,  now  held  to  be  unjust  by  the  highest 
court  in  the  land,  could  possibly  be  had.  The  loss  was  irrep- 
arable. The  frequency  of  complaints  of  this  sort,  involving 
the  absolute  reasonableness  of  rates,  proves  conclusively  how 
potent  a  factor  in  furthering  legislation  the  rise  of  the  scale  of 
charges  had  become. 

The  demonstration  of  the  menace  to  public  welfare  of  an 
inordinate  concentration  of  financial  power  in  the  hands  of  a 
few  privileged  individuals,  served  a  useful  end  in  bringing  about 
new  legislation.  The  general  rise  of  rates  had  been  a  direct 
outcome  of  the  substitution  of  combination  for  competition 
among  railroads.  The  danger  of  absolute  dominion  over  all 
trade,  commerce  and  finance  without  accountability  to  the 
law,  was  a  concomitant  of  the  growth  of  great  railroad  systems.^ 
A  special  investigation  in  1905  showed,  for  example,  that  the 
majorities  of  the  boards  of  directors  of  practically  all  of  the 
roads  east  of  the  Mississippi  river  might  be  selected  from  a 
group  of  only  thirty-nine  persons.  The  spectacular  career  of 
Edward  H.  Harriman  with  the  Union  Pacific  and  other  com- 
panies was  a  convincing  argument  in  itself.  The  disclosures 
in  the  New  York  insurance  investigation  of  1905  as  to  the 
intricate  ramifications  of  financial  power  came,  as  will  shortly 
appear,  at  a  most  opportune  time  for  promoting  congressional 
activity.  The  need  of  it  was,  perhaps,  never  more  clearly  shown 
than  in  the  following  frank  admission  by  Mr.  Harriman  in 
December,  1906,  —  only  a  few  months  after  the  law  had  been 
amended,  —  made  in  the  course  of  a  general  investigation  of 
railroad  consofidations  by  the  Interstate  Commerce  Commis- 

1  Cf.  data  on  concentration  of  railway  control  in  the  United  States 
App.  VI,  Digest  of  Hearings  before  Senate  (Elkins)  Committee  on  Inter- 
state Commerce,  1905,  pp.  1-56. 


THE  ROOSEVELT  LEGISLATION  491 

sion.^     Questioned  as  to  where  his  policy  of  acquisition  was  to 
end,  the  following  colloquy  ensued: 

"A.  I  would  go  on  with  it.  If  I  thought  we  could  realize  some- 
thing more  than  we  have  got  from  these  investments  I  would  go  on  and 
buy  some  more  tilings. 

"Q.   Supposing  that  you  got  the  Santa  Fe? 

"A.   You  would  not  let  us  get  it. 

"Q.   How  could  we  help  it? 

"A.  How  could  you  help  it?  I  think  you  would  bring  out  your 
power  to  enforce  the  conditions  of  the  Sherman  anti-trust  act  pretty 
quick.     If  you  will  let  us,  I  will  go  and  take  the  Santa  Fe  to-morrow. 

"Q.   You  would  take  it  to-morrow? 

"A.  Why,  certainly  I  would;  I  would  not  have  any  hesitation; 
it  is  a  pretty  good  property. 

"Q.  Then  it  is  only  the  restriction  of  the  law  that  keeps  you  from 
taking  it? 

"A.   I  would  go  on  as  long  as  I  hve. 

"Q.  Then  after  you  had  gotten  through  with  the  Santa  Fe  and 
had  taken  it,  you  would  also  take  the  Northern  Pacific  and  Great 
Northern,  if  you  could  get  them? 

"A.   If  you  would  let  me. 

"Q.  And  your  power,  which  you  have,  would  gradually  increase 
as  you  took  one  road  after  another,  so  that  you  might  spread  not  only 
over  the  Pacific  coast,  but  spread  out  over  the  Atlantic  coast? 

"A.  Yes." 

Was  there  ever  a  clearer  case  of  megalomania,  menacing  the 
welfare  of  a  great  people? 

But  it  was  not  alone  the  dangers  incident  to  monopoly  in 
transportation  which  excited  popular  alarm.  There  was  the  ever 
increasing  danger  of  abuse  of  monopolistic  power  by  the  newly 
created  industrial  combinations.  Most  of  these  had  sprung 
up  overnight  in  the  great  promotion  movement  of  1899-1901. 
The  general  public  had  long  been  aware  of  the  gross  favoritism 
in  transportation,  which  had  created  the  Standard  Oil  Com- 
pany. It  knew  something  of  the  power  of  the  beef  packers' 
monopoly,  built  up  by  the  use  of  private  car  lines.  But  with 
the  publication  of  Miss  Tarbell's  History  of  the  Standard  Oil 
1 12  I.C.C.  Rep.,  L 


492  RAILROADS 

Company  in  1903-1904,  followed  by  the  reports  of  the  United 
States  Commissioner  of  Corporations  in  1906,  its  attention 
was  newly  directed  to  the  evil.^  Even  the  carriers  themselves 
were  now  roused  to  protest  by  the  pressure  for  secret  favors 
by  large  shippers.  The  Elkins  amendments  to  the  law  in  1903, 
as  we  shall  see,  enabled  the  government  to  convict  many  offend- 
ers. But  even  this  new  law  was  not  enough.  The  rebating 
still  went  on,  under  new  and  ingenious  forms.  If  the  United 
States  Steel  Corporation,  the  "Sugar  Trust,"  the  International 
Harvester  Company,  the  Colorado  Fuel  and  Iron  Company 
and  a  host  of  others  were  not  restrained,  monopoly  in  trans- 
portation would  soon  be  followed  by  monopoly  in  manufacture. 
Each  new  disclosure  verified  the  suspicions  of  the  public  as  to 
the  magnitude  of  these  abuses.  The  necessity  of  a  special 
corrective  was  first  applied  to  rebating;  but  this  action  in  turn 
only  served  to  reenforce  the  popular  conviction  that  more 
general  legislation  was  necessary.  The  Elkins  amendments 
of  1903  surely  paved  the  way  for  the  Hepburn  law  three  years 
thereafter. 

The  so-called  Elkins  amendments  to  the  Act  of  1887,  — 
the  first  changes  of  importance  in  its  substantive  clauses,  — 
were  made  in  1903,  in  response  to  a  demand  of  the  carriers. 
Educated  to  a  sense  of  the  grave  losses  of  revenue  incident  to 
rebating  and  general  rate  cutting,  prominent  railroad  men 
united  in  urging  Congress  to  act.  The  ease  and  decorum  with 
which  this  legislation  was  passed  is,  in  itself,  eloquent  testimony 
to  the  organized  influence  of  the  railroads  over  Congress,  which 
made  itself  felt  during  the  next  few  years  in  opposition  to 
further  changes  in  the  law  for  the  benefit  of  the  public.  The 
entire  inadequacy  of  the  original  act  to  prevent  rebating  had 
been  proven  time  and  again.  The  Interstate  Commerce  Com- 
mission had  done  its  best.  The  Department  of  Justice  had 
attempted  to  apply  the  equity  processes  of  injunction  without 
^  Chapter  VI  gives  details  as  to  these  events. 


THE  ROOSEVELT  LEGISLATION  493 

much  result.  Other  Federal  laws  had  been  invoked  in  vain. 
When  the  carriers  themselves  asked  for  more  stringent  legisla- 
tion, it  was  accorded  by  Congress  with  commendable  despatch. 
No  opposition  whatever  appeared.  Nor  was  there  much  de- 
bate. The  machinery  of  legislation  moved  expeditiously  and 
almost  -without  noise  to  the  desired  end. 

These  Elkins  amendments  dealt  solely  with  the  pro\dsions 
of  law  concerning  observance  of  pubhshed  tariffs.  They  in 
no  wise  affected  the  determination  of  what  those  tariffs  should 
be.  That  problem  of  reasonableness  was  the  bone  of  conten- 
tion in  the  great  struggle  in  Congress,  hardly  as  yet  under 
way  but  soon  to  follow.  The  changes  in  1903,  therefore,  had 
mainly  to  do  with  penalties  and  legal  procedure.  They  were, 
as  elsewhere  outlined,  five  in  number.  The  raih-oad  corporation 
itself,  —  and  not  merely  its  officers  and  agents  as  heretofore,  — 
was  made  liable  to  prosecution  and  penalty.  This  put  an  end 
to  the  anomalous  immunity  hitherto  enjoyed  by  the  principal 
and  beneficiary  of  a  g-uilty  transaction.  Secondly,  the  penalty 
of  imprisonment  for  departure  from  the  published  tariff,  — 
added  to  the  law  in  1889  in  the  hope  of  rendering  it  more  effec- 
tive, —  was  removed.  It  had  been  hoped  that  the  reluctance 
of  witnesses  to  become  parties  to  such  condign  punishment  of 
associates  might  thus  be  somewhat  overcome;  especially  since 
the  Hability  to  fines  now  ran  to  the  corporation  rather  than  to 
the  individual.  The  third  change  in  the  law  was  of  great 
importance,  as  it  had  been  construed  by  the  courts.  Prefer- 
ential treatment  of  shippers  had  been  made  to  depend  upon 
proof;  first,  that  rates  lower  than  as  pubhshed  in  the  tariff  had 
actually  been  allowed;  and,  in  the  second  place,  that  these  full 
tariff  rates,  or,  at  least,  higher  rates,  had  been  paid  by  others 
on  like  shipments  at  the  same  time.  Such  proof  had  turned 
out  to  be  practically  impossible  in  any  general  rate  war;  inas- 
much as,  at  such  times,  rates  were  cut  more  or  less  substantially 
for  all  shippers  alike.  In  other  words,  there  might  well  be 
departure  from  the  published  rates,  without  preferential  treat- 


494  RAILROADS 

ment.  And  it  was  the  object  of  the  law  to  put  a  stop  to  both  of 
these  abuses.  The  Elkins  law,  therefore,  explicitly  made  the 
published  tariff  the  standard  of  lawfulness.  Any  departure  from 
it,  proven  by  itself  alone,  was  declared  a  misdemeanor.  In 
the  fourth  place,  the  new  law  made  shippers  or  any  other  inter- 
ested parties  defendants;  whereas  formerly  only  the  giver  of 
rebates,  not  the  recipient,  could  be  prosecuted.  This  change 
rendering  the  guilty  shipper  liable,  was  an  eminently  proper 
one.  And  then,  finally,  the  new  law  provided  for  the  issuance 
of  injunctions,  —  viz.,  peremptory  orders  punishable  by  con- 
tempt of  court,  —  by  any  Federal  judge  whenever  the  Inter- 
state Commerce  Commission  had  reasonable  ground  for  belief 
that  any  common  carrier  was  deviating  from  the  published 
tariff,  "or  is  committing  any  discrimination  forbidden  by  law." 
A  summary  prohibition  from  this  judicial  source,  it  was  hoped, 
would  act  as  a  powerful  deterrent. 

The  enactment  of  more  general  remedial  legislation  than 
the  Elkins  amendments  was  a  far  more  serious  matter.  That 
statute  has  not  inaptly  been  described  as  "not  even  a  prelim- 
inary skirmish.  It  was  a  truce  of  the  principals  to  abolish 
piracy."  The  original  law  of  1887  was  avowedly  experimental 
and  imperfect.  With  this  in  view  the  statute  had  specifically 
directed  that  there  should  be  transmitted  to  Congress  in  its 
annual  reports  "such  recommendations  as  to  additional  legis- 
lation ...  as  the  Interstate  Commerce  Commission  may  deem 
necessary."  This  duty  was  conscientiously  performed  year 
by  year.  One  may  find,  therefore,  in  these  documents,  espe- 
cially after  1896,  the  most  convincing  presentation  of  the  need 
for  amendment  of  the  law.  Yet  despite  its  importance.  Con- 
gress was  for  some  years  so  intent  upon  more  pressing  public 
business,  that  no  action  was  taken  in  the  matter.  Currency 
legislation,  the  Spanish  War  and  the  Philippines,  the  Isthmian 
Canal,  pure  food  and  the  trusts  quite  engrossed  public  atten- 
tion.   And,  oddly  enough,  when  the  campaign  opened  seriously 


THE  ROOSEVELT  LEGISLATION  495 

in  1899,  activity  was  for  a  time  confined  mainly  to  the  Senate. 
This  was  in  sharp  contrast  wdth  the  situation  both  before  1887 
and  after  1905,  when  the  upper  house  was  the  obstructive 
member. 

As  early  as  1894  the  Senate  Committee  on  Interstate  Com- 
merce had  reported  favorably  a  bill;  but  nothing  came  of  it. 
Five  years  later,  both  Senators  Cullom  of  Illinois,  —  sponsor 
for  the  original  law,  —  and  Chandler  of  New  Hampshire  intro- 
duced bills.  All  these  measures  aimed  to  confer  rate-making 
power  upon  the  commission  and  to  expedite  judicial  procedure 
upon  appeal.  In  the  meantime  important  organizations, 
especially  in  the  West,  such  as  the  National  Board  of  Trade  and 
the  Conventions  of  State  Railroad  Commissioners,  had  taken 
the  matter  up.  Much  e\ddence  was  heard  by  the  United  States 
Industrial  Commission  which  dealt  with  it  in  an  elaborate  report 
in  1901.^  The  chances  seemed  favorable  for  action.  The 
Senate  Committee  on  Interstate  Commerce  in  that  year  added 
several  progressively  inclined  members.  The  general  freight 
rate  increases  of  1900  had  greatly  stirred  the  people.  But  at 
this  juncture  the  powerful  new  financial  influences,  concerned 
with  the  formation  of  the  great  transportation  systems,  came 
into  play.  Effective  regulation  might  interfere  with  some  of 
these  plans.  The  matter  was  becoming  serious.  Railroad 
opposition  began  to  organize.  It  became  clear  that  a  bitter 
contest  would  be  needed  to  secure  legislation. 

Renewed  pressure  from  the  public  came  in  1902.  Senator 
Chandler  had  been  retired  by  direct  railroad  influence  in  New 
Hampshire.  But  Senator  Cullom  again  brought  in  a  bill,- 
which  was  consolidated  wdth  another  by  Senator  Nelson  of 
IVIinnesota.  Public  interest  was  plainly  rising;  yet  these 
measures  all  died  in  committee.  And  the  House  of  Repre- 
sentatives was  too  busy  wdth  other  concerns.     But  in  1903, 

1  The  evidence  is  in  vols.  IV  and  IX.  Our  final  report  on  the  subject 
is  in  vol.  XIX. 

2  B.  H.  Meyer,  Railway  Legislation  in  the  United  States,  1903,  is  best 
on  this  period. 


496  RAILROADS 

for  the  first  time,  the  lower  house  devoted  some  attention  to 
the  so-called  Cooper-Quarles  bill;  ^  although  no  vote  was 
taken.  It  did,  however,  ^\^th  little  debate,  as  we  have  seen, 
grant  what  the  railroads  asked  for  the  suppression  of  rebating 
in  the  passage  of  the  Elkins  amendments.  The  necessity  of 
general  legislation  on  the  subject  was  not  yet  strongly  felt. 
The  trusts,  floundering  in  the  panic  of  1903,  seemed  more 
threatening  to  public  order  than  the  railroads.  Only  in  a  few 
communities  like  Wisconsin  under  the  able  leadership  of  Gov- 
ernor La  Follette,had  public  opinion  become  sufficiently  aroused 
to  achieve  definite  results. 

Matters  were  finally  brought  to  a  head  by  the  determined 
attitude  of  President  Roosevelt.  In  his  annual  message  to 
Congress  in  1904  he  made  railroad  regulation  "a  paramount 
issue."  The  remedies  proposed  differed  little  from  those  of  the 
bills  above  mentioned.  The  cardinal  point  was  that  the  Inter- 
state Commerce  Commission  was  to  be  given  power  to  prescribe 
actual  rates,  to  be  effective  until  reversed  by  the  courts.  Under 
this  spur,  the  House  of  Representatives  passed  the  so-called 
Esch-Townshend  bill  —  an  administration  measure  —  by  the 
impressive  majority  of  326  to  17.  It  was  now  the  Senate's 
turn  to  delay.  It,  however,  authorized  its  Interstate  Com- 
merce Committee  to  sit  during  the  spring  and  summer,  and 
to  report  in  December."^  A  mass  of  testimony  was  taken, 
which  despite  the  activity  of  a  powerful  body  of  paid  railroad 
attorneys,  proved  to  be  most  convincing.  But  even  more 
cogent  proof  of  the  need  of  control  was  the  outrageous  attempt 
of  the  carriers  to  influence  popular  opinion  through  so-called 
publicity  bureaus.^  An  extensive  service,  regardless  of  cost, 
was  set  up  \Wth  headquarters  at  Washington  and  with  branches 

1  Fully  discussed  in  Haines,  Restrictive  Railroad  Legislation,  1905, 
p.  265  et  seq. 

2  Hearings  before  the  Committee  on  Interstate  Commerce,  Senate 
of  the  United  States,  Dec.  16,  1904  to  May  23,  1905;  5  vols.,  appendices, 
digests,  etc.;   commonly  known  as  the  Elkins  Committee. 

^  The  Chicago  Tribune  and  the  Record-Herald  effectively  exposed  the 
affair.     Cf.  Colliers  Weekly,  May  4,  1907,  for  a  good  resume. 


THE  ROOSEVELT  LEGISLATION 


497 


in  all  the  leading  cities,  headed  by  the  President  of  the  Southern 
Railway.  Bogus  conventions,  packed  for  the  purpose,  —  such 
as  the  "Alabama  Commercial  and  Industrial  Association,"  — 
passed  resolutions  unanimously,  to  be  scattered  broadcast  by 
free  telegraphic  despatches  all  over  the  country.  "Associations 
for  the  Maintenance  of  Property"  held  conventions;  the  fact 
being  duly  advertised.  Palpably  garbled  news  items  from 
Washington  were  distributed  without  cost,  especially  during 
the  hearings  of  the  Senate  Committee.  Even  more  insidious 
and  misleading  methods  were  employed.  An  elaborate  card 
catalogue  of  small  newspapers  throughout  the  United  States 
was  made;  in  which  was  noted  all  of  the  hobbies,  prejudices, 
and  even  the  personal  weaknesses  of  the  editors.  One  of  the 
cards  is  reproduced  on  this  page.     Magazine  sections  or  "ready 


Town        Name  of  Papeb 

Circulation 

Date  of  Issue 

Politics 

600 

Wkly 

Hera                           '■ 

1167 

\              10870 
C  M  St  P 

Owner  !c  Kd 

Infl.   small 
2nd  paper 
Fanners 
¥eak  Eds 
1,.?0 

sat 
6- 

Anti-teef                         j 
Anti-oil                           i 
Anti-harvestor             : 
Anti-corp                         : 
Anti-Rep                           i 
Machine                          ; 
Pro-R  R                             : 
Pro-Roosevelt 

S  D4Cllp^ls  w^k  and  tibulous  man.   Tractatle  to  R  R  suggestions.  ; 
i                    Many  Bohemians  in  region.     Rich  county.     Junction  town. 

Duplicate  copied  from  a  card  in  the  Chicago  Publicity  Bureau's  index  of 
newspapers.  These  cards  furnish,  in  the  last  column,  detailed  informaticm  as 
to  the  position  of  the  editor  on  pubhc  questions.  At  the  bottom  they  indicate 
by  what  opening  he  could  be  persuaded  to  accept  railroad  "doctrine."  The 
data  which  would  identify  the  paper  and  editor  on  this  card  have  been  erased. 

to  print"  insides  were  also  made  up,  in  which  appropriate  and 
subtle  references  to  railroad  issues  were  concealed  in  a  mass  of 
general  reading  matter.  Two  or  three  weekly  letters  were 
sent  gratis  to  minor  newspapers  without  regular  Washington 
correspondents,  containing  "good  railroad  doctrine,"  together 
VOL.  I — 32 


498  RAILROADS 

with  spicy  local  news  items.  Dakota  farmers  got  suggestions 
as  to  the  danger  of  the  proposed  legislation  affecting  their  rates. 
Kentucky  planters  were  warned  of  the  probable  effect  upon  to- 
bacco prices.  As  an  indication  of  the  formidable  proportions  of 
this  campaign  of  education,  the  Chicago  office,  alone,  employed 
some  forty  highly  paid  experts.  Regular  reports  were  rend- 
ered by  this  news  service  to  the  railroads'  committee,  as  to  the 
results  achieved;  setting  forth  the  number  of  columns  of  news 
matter  distributed  and  the  changes  effected  in  the  proportion 
of  "pro"  and  "con"  items  published.  It  was  indeed  a  most 
astounding  demonstration  of  the  lengths  to  which  organized 
corporate  power  would  go  to  defeat  regulative  legislation. 
That  it  proved  upon  exposure  to  be  a  boomerang  for  the  rail- 
road cause,  is  to  be  inferred  from  the  entire  absence  of  all  such 
political  methods  from  the  succeeding  campaigns  dealing  with 
further  amendment  of  the  law. 

The  President  again  insisted  upon  action  in  the  annual 
message  of  1905,  this  time  recommending  control  over  maxi- 
mum, not  absolute,  rates. ^  Executive  pressure  was  brought 
to  bear  heavily  upon  Congress.  The  public  was  plainly  be- 
coming insistent;  with  the  result  that  the  so-called  Hepburn 
bill  was  passed  by  346  votes  to  7.  "WTiether  the  Senate,  under 
the  influence  of  one  of  the  most  powerful  lobbies  ever  let  loose 
upon  a  legislative  body,  would  have  yielded  even  then,  had  it 
not  been  for  an  extraordinary  conjuncture  of  economic  events, 
one  dare  not  surmise.  The  general  causes  of  dissatisfaction, 
already  described,  such  as  the  spread  of  combination,  the 
growth  of  autocratic  power,  the  steady  rise  of  freight  rates  and 
the  abuses  of  personal  favoritism  had  been  long  at  work.     But 


^  Senator  La  Follctte  in  his  Autobiography,  American  Magazine, 
June,  1912,  p.  185,  avers  that  the  president's  main  insistence  at  first  was 
upon  discriminations,  not  absolutely  unreasonable  charges;  but  the  con- 
sumer is  mainly  interested  in  the  latter  point.  The  claim  is  made  that 
the  suggestion  of  thorough  going  control  came  from  this  personal  source. 
La  Follette's  three-day  speech  on  April  19-21  was  certainly  the  ablest 
presentation  made  of  the  progressive  policy  of  regulation. 


THE  ROOSEVELT  LEGISLATION  499 

now  at  the  psychological  moment  came  the  general  b^eakdo^\^l 
and  congestion  of  railroad  service  all  over  the  comitry;  ^ 
the  insurance  investigation  in  New  York;  the  Pennsylvania 
Railroad  coal  car  scandal  ;2  the  Atchison  rebate  disclosures, 
with  "barefaced  disregard  of  the  law,"  besmirching  a  member 
of  the  President's  cabinet;^  and  the  exposure  of  the  outrageous 
pubhcity  campaign  methods  of  the  carriers.  The  evidence 
was  cumulative  and  overwhelming  as  to  the  need  of  action. 
The  Senate  was  forced  to  acquiesce  in  a  conference  committee 
bill,  passing  it  at  the  end  with  only  three  dissenting  votes. ^  On 
June  29,  1906,  the  Hepburn  bill  became  law.  The  fundamental 
principle  of  governmental  control  over  the  most  powerful 
corporations  in  the  country  had  been  fully  affirmed.  It  was  an 
historic  event,  —  the  most  important,  perhaps,  in  Theodore 
Roosevelt's  pubhc  career,  —  and  a  not  insignificant  one  in  our 
national  history. 

The  Hepburn  law  of  1906,  in  the  first  place,  greatly  broad- 
ened the  field  of  Federal  regulation.^  This  was  now  extended 
to  cover  both  express  and  sleeping-car  companies.  Pipe  fines, 
—  such  powerful  factors  in  the  creation  of  monopoly  in  the  oil 
business  as  opportunely  showed  by  the  Report  of  the  Commis- 
sioner of  Corporations  in  1906,  —  were  expressly  included. 
"Transportation"  was  now  broadly  defined  as  comprehending 
among  other  things,  "all  services  in  connection  with  the  receipt, 
delivery,  elevation,  and  transfer  in  transit,  ventilation,  refriger- 

1  Chapter  II,  pp.  62  and  80,  supra. 

2  Chapter  VI,  p.  199,  supra.  '  P.  195,  supra. 

^  Munsey's  Magazine  for  March,  1912,  has  a  good  review  of  the  Con- 
gressional battle;  with  details  of  the  defeat  of  the  Aldrich-Cannon 
contingent. 

^  The  best  references  on  the  Hepburn  Act  are  as  follows :  Dixon, 
F..  H.,  Quarterly  Journal  of  Economics,  XXI,  1906,  pp.  22-51;  Smalley, 
H.  S.,  Annals  American  Academy  of  Political  Science,  1907,  pp.  292-309. 
The  course  of  events  is  currently  well  reported  in  the  file  of  the  Railway 
Age  Gazette.  Cf.  also,  Review  of  Reviews,  May  and  July,  1906;  and  the 
magazine  references  in  the  Bibliography  on  Railroads  of  the  Library  of 
Congress. 


500  RAILROADS 

ation  or  icing,  storage,  and  handling  of  property  transported." 
Whether  certain  of  these  powers,  especially  over  pipe  lines,  are 
practically  enforcible  as  well  as  legally  sound,  remains  yet  to 
be  seen.  The  inclusion  of  all  switches,  spurs,  and  terminal 
facilities,  with  appurtenances  of  all  sorts,  was  an  added  detail 
of  importance,  in  view  of  the  complicated  uses  made  of  them 
in  connection  with  rebating,  as  elsewhere  described.  And  the 
express  power  to  require  facilities  for  shipment,  as  well  as  to 
regulate  joint  rates  and  services  in  every  detail,  was  yet  another 
notable  extension  of  Federal  authority.  Part-rail  and  part- 
water  transportation  was  included;  but  coastwise  and  inland 
traffic  exclusively  by  water,  was  left  out.  In  view  of  its  inti- 
mate relation  to  rates  and  services  by  rail,  this  omission  was 
unfortunate.  The  notorious  instability  of  water  rates  and  the 
difficulties  incident  to  the  enforcement  of  the  long  and  short 
haul  clause,  render  such  water-borne  traffic  of  great  importance 
in  the  proper  regulation  of  carriers  on  land. 

The  significance  of  the  Hepburn  law,  however,  was  not 
primarily  in  the  wider  scope  of  Federal  control.  The  heart  of 
it  consisted  of  its  more  intensive  character.  The  rate-making 
power  of  the  Commission  was  greatly  increased.  Two  other 
points  were  contested  with  equal  vigor,  viz.,  the  scope  of  judi- 
cial review  of  decisions  of  the  Commission,  and  the  question 
as  to  whether  its  orders  in  cases  appealed  should  take  effect  at 
once,  or  only  upon  final  j  udgment  by  the  Federal  court.  Viewed 
in  a  large  way,  however,  all  three  of  these  propositions  depended 
upon  the  determination  of  a  basic  issue.  A  clear  separation  of 
powers  between  the  legislative,  executive  and  judicial  branches 
of  government  was  a  fundamental  principle  in  our  Federal 
Constitution.  It  was  generally  agreed  that  a  considerable 
confusion  of  functions,  laid  upon  the  Commission  by  the  original 
law,  must  in  future  be  avoided.  Here,  it  was  said,  was  a  body 
which,  if  empowered  to  make  rates,  would  be  exercising  a  legis- 
lative function;  if  applying  and  enforcing  them,  would  be 
acting   administratively;    and   if   hearing   complaints,   would 


THE  ROOSE\"ELT  LEGISLATION  501 

be  serving  as  a  court.  It  was  generally  conceded,  nevertheless, 
except  by  a  few  extremists,  that  the  time  had  now  come  when 
some  competent  tribunal  must  be  provided  for  the  effective 
and  prompt  settlement  of  transportation  disputes.  To  which 
one  of  these  three  branches  of  the  government  should  this  im- 
portant duty  be  assigned?  In  other  words,  disregarding  mere 
matters  of  detail,  should  the  Interstate  Commerce  Commission 
or  the  Federal  courts  be  charged  with  the  real  control  of  the 
common  carriers  of  the  country? 

The  alignment  upon  this  question  was  clearly  defined.  The 
administration  and  the  representatives  of  the  shippers  and  the 
general  public,  were  unanimously  agreed  that  control  of  rates 
and  regulations,  to  be  effective  must  be  through  an  adminis- 
trative agency,  —  a  body,  that  is  to  say,  attached  to  the  execu- 
tive branch  of  the  government.  Their  reasons  will  be  set 
forth  in  due  time.  On  the  other  hand  every  railroad  proposi- 
tion was  based  upon  the  exercise  of  real  control  by  the  judiciary. 
The  Commission,  as  an  administrative  body,  was  not  to  be 
abolished;  but  in  all  matters  of  rate  regulation  it  was  to  be 
subordinated  to  the  courts.  The  motives  for  this  policy  will 
also  appear  shortly.  Senator  Foraker  of  Ohio,  —  soon  retired 
because  of  his  uncompromisingly  pro-railroad  attitude,  — 
proposed  to  strip  the  Commission  of  all  rate-making  power 
whatsoever;  and  to  reduce  it  to  an  initiating  body  which  should 
merely  certify  all  complaints  to  the  Federal  courts  for  settle- 
ment. Senator  Elkins  of  West  Virginia,  —  an  equally  ardent 
railroad  representative,  —  introduced  a  bill  to  create  a  special 
transportation  court,  subordinate  only  to  the  Supreme  Court 
of  the  United  States  on  questions  of  law.  Until  this  tribunal 
had  heard  the  cause,  and  had  sanctioned  interference  on  the 
ground  of  unreasonableness,  the  Interstate  Commerce  Commis- 
sion might  not  intervene.^    And  in  any  event  its  functions  were 

^  Compare  this  vith  the  plans  proposed  by  W.  C.  Noyes,  American 
Railroad  Rates,  1905,  p.  255;  and  A.  N.  Merritt,  Federal  Regulation  of 
Railway  Rates,  1907,  p.  193. 


502  RAILROADS 

to  be  mainly  connected  with  the  enforcement,  not  the  promuU  ■ 
gation,  of  orders  as  to  rates  or  service.  These  plans  favoring 
the  carriers'  interests,  as  we  shall  see,  were  all  based  upon  the 
proposition  that  Congress  could  not  constitutionally  delegate 
general  rate  making,  that  is  to  say,  legislative  power  to  an 
administrative  body. 

The  constitutionahty  of  clothing  an  administrative  body 
with  large  regulative  power  by  act  of  Congress,  was,  of  course, 
essential  to  the  administration's  plan.  It  was  urged  that  there 
was  one  exception  to  the  general  rule  that  power  delegated 
to  Congress  to  legislate  under  the  Constitution  could  not  be 
further  delegated.  "There  may  be  such  delegation  where  the 
purpose  in  the  original  conferring  of  the  power  can  be  subserved 
only  by  its  delegation  to  an  agent.  Ob%'iously  Congress  cannot 
spend  time  and  labor  upon  rate  making,  even  were  it  economi- 
cally competent  to  do  so.  If  the  power  is  to  be  exercised  at 
all,  practically,  it  can  be  done  only  through  an  agency  like  the 
Commission."  Congress  certainly  could  not  delegate  such 
legislative  power,  viz.,  power  to  make  rates,  to  the  courts. 
That  would  even  more  flagrantly  transgress  the  constitutional 
rule.  In  brief,  any  plan  for  judicial  control  meant  the  exclusion 
of  rate  regulation  in  any  thorough-going  way.  And  that,  of 
course,  was  the  reason  why  the  "railroad  Senators"  all  insisted 
upon  such  a  plan.  Other  support  for  the  administration  plan 
was  found  in  the  dictu7n  of  the  court  in  the  Maximum  Rate 
case;  ^  and  in  opinions  cited  by  the  Attorney-General  in  a  special 
message  on  the  subject  to  the  Senate.^  These  and  other  points, 
such  as  the  bearing  of  the  so-called  "preference  clause"  of  the 
Federal  Constitution  requiring  equality  of  treatment  in  com- 
merce between  all  ports  of  the  United  States,  need  not  detain 
us  further.     The  constitutionality  of  the   amendments  have 


1  Chapter  XIV,  p.  468,  supra. 

2  Hearings,  Senate  Committee  on  Interstate  Commerce,  1905,  II,  pp. 
1662-1674.  Cf.  also  Digest,  pp.  84-87;  and  Review  of  Reviews,  May, 
1906. 


THE  ROOSEVELT  LEGISLATION  503 

now  been  duly  upheld.  But,  inasmuch  as  the  particular  form 
which  the  law  assumed  was  the  outcome  of  these  debates,  it 
is  essential  that  they  be  reviewed.  Other  questions  of  inter- 
pretation at  a  later  time,  also  follow  the  same  line  of  cleavage 
in  debate. 

Judicial  regulation  of  common  carriers,  as  proposed  by  the 
railroad  advocates,  was  open  to  many  objections;  so  controlling 
that  they  fortunately  turned  the  scales  in  favor  of  the  admin- 
istration plan.  The  first  of  these  was  in  itself  so  fatal  that  it 
is  almost  a  work  of  supererogation  to  state  the  others.  Judicial 
control,  as  we  have  seen,  had  been  the  outcome  under  the  old 
law.  It  was  the  desperate  plight  from  which  escape  was 
sought.  No  decisions  could  be  rendered  until  the  rate  or  prac- 
tice had  been  put  into  effect.  The  denial  of  power  to  make 
rates  for  the  future  had  broken  down  the  old  law.  The  stable 
door  might  indeed  be  closed,  but  only  some  years  after  the 
horse  had  been  stolen.  Therein  lay  the  primary  defect  of  all 
judicial  processes.  When  the  bituminous  coal-carrying  roads 
and  water  lines  were  collecting  fifty  cents  a  ton  additional  on 
10,000,000  tons  of  coal  annually,  destined  for  New  England 
alone,  as  a  result  of  the  practical  elimination  of  monopoly  since 
1904,  the  only  effective  way  to  prevent  irreparable  loss  to  con- 
sumers, would  be  to  veto  the  increase  before  it  went  into  effect. 
For  a  Federal  judge  to  hold  it  an  unreasonable  exaction,  four 
years  or  even  six  months  after  it  had  been  paid,  would  be  of 
no  benefit  to  the  coal-consuming  public,  upon  which  the  inci- 
dence of  the  tax  really  fell. 

The  entire  futility  of  judicial  control  was  well  exemplified 
in  the  Colorado  Fuel  and  Iron  Company  case  of  1895.  This 
corporation  complained  of  excessive  rates  from  Pueblo,  Colo- 
rado, to  San  Francisco  on  iron  and  steel.  The  Interstate 
Commerce  Commission  ordered  the  rates  on  steel  rails  not  to 
exceed  forty-five  cents  per  one  hundred  pounds,  or  seventy-five 
per  cent,  of  the  Chicago-San  Francisco  rate  on  the  same  com- 
modity, whatever  that  might  be.     The  Southern  Pacific,  under 


504  RAILROADS 

pressure,  complied  with  this  order  for  about  two  years;  and 
then  in  1898  advanced  the  rate  one-third,  to  sixty  cents  per 
one  hundred  pounds.  Thereupon  the  Iron  Company  obtained 
an  injunction  from  the  United  States  Circuit  Court  prohibiting 
the  violation  of  the  Commission's  order.  The  case  went  to 
the  Circuit  Court  of  Appeals,  which  reversed  this  decree. 
Meantime,  proceedings  before  a  master  had  fixed  the  amount 
of  damages  under  the  rate  increase  at  S35,300.  The  court 
held  that  these  damages,  if  due,  could  be  recovered  before  a 
jury  which  should  establish  the  unreasonableness  of  the  rates 
in  force.  But  while  this  was  being  done,  what  became  of  the 
California  business  of  the  Colorado  Fuel  and  Iron  Company? 
The  Pacific  coast  was  one  of  its  most  important  markets.  The 
price  of  steel  rails  for  competitors  from  Pittsburg  or  Europe, 
who  ship  by  water,  would  remain  quite  undisturbed.  It  would 
be  difficult  to  recover  trade  when  once  lost.  No  damages, 
based  upon  mere  increased  freight  rates,  actually  paid,  would 
begin  to  measure  the  possible  loss.  And,  moreover,  even  if 
this  sum  were  recovered  after  prolonged  litigation,  the  situation 
would  not  be  remedied.  Precisely  the  same  rates  which  gave 
rise  to  the  damages  would  still  be  in  effect.  An  indefinite  series 
of  litigations  might  result,  which  would  harass  the  company  and 
perhaps  drive  it  from  the  field  altogether.  The  outcome  of  this 
Southern  Pacific  case  sufficiently  proves,  even  where  the  shipper 
is  a  powerful  corporation,  the  futility  of  seeking  redress  through 
judicial  proceedings.  Again  and  again  one  is  forced  back  to  the 
same  conclusion:  that  the  only  remedy  for  an  unjust  rate  is  not 
to  continue  an  unfair  one  and  pay  damages,  but  as  speedily  as 
possible  to  substitute  a  reasonable  charge.  How  much  greater 
force  has  this  conclusion  for  the  small  shipper,  if  the  remedy 
fails  even  for  an  industrial  combination,  powerful  enough  to 
extort  secret  rebates  of  $1,000  a  day  from  the  Atchison  rail- 
road, as  proved  in  the  now  celebrated  Morton  case  of  1906! 
Other  serious  objections  to  judicial  control  may  be  briefly 
stated.     The  functions  of  a  court,  acting  judicially,  permit  of 


THE  ROOSEVELT  LEGISLATION  505 

reliance  as  to  reasonableness  upon  only  one  standard,  viz., 
that  the  rate  or  practice  under  consideration  will  lead  to  con- 
fiscation of  property.  The  courts  can  set  this  maximum  limit 
to  charges;  but  above  that  point  they  are  powerless  to  inter- 
vene. Rates  for  the  future  must  be  judged  with  the  same 
freedom  exercised  by  the  traffic  officials  who  promulgated  them 
in  first  instance.  Correction  can  be  applied  only  by  an  expert 
tribunal,  possessed  of  the  same  sort  of  knowledge  had  by  those 
who  issued  the  tariff  or  ordered  the  practice  at  the  outset. 
Of  course,  the  objection  of  lack  of  technical,  knowledge  on  the 
part  of  judges,  might  be  readily  enough  overcome  by  means  of 
a  specialized  professional  personnel.  But  the  objection  that 
judicial  control,  in  contradistinction  to  administrative  regula- 
tion, is  necessarily  intermittent  rather  than  steady  and  constant 
is  one  not  so  easily  met.  As  has  been  recently  well  said  of  our 
Federal  policy  toward  the  trusts,  "Government  by  a  series  of 
explosions  is  rarely  effective."  There  are  too  many  and  too 
long  intervals  between  decisions.  And  then  again,  there  is  the 
slowTiess  of  formal  court  proceedings  and  the  necessarily  con- 
servative attitude  of  judges,  in  matters  concerning  vested 
property  rights.  These  arguments  were  all  unanswerable  in 
the  end.  It  was  inevitable  that  control  should  be  exercised  by 
a  distinct  enlargement  of  the  powers  of  the  Interstate  Com- 
merce Commission,  as  an  adjunct  of  the  executive  arm  of  the 
government. 

The  law  of  1906  ^  authorized  the  Commission  upon  complaint 
to  "determine  and  prescribe"  just  and  reasona,ble  maximum 
rates,  regulations  or  practices  to  be  thereafter  observed;  and 
to  order  conformity  thereto.  Such  orders,  except  for  money 
payments,  were  to  become  effective  after  thirty  days;  and  were 
to  remain  in  force  for  two  years,  unless  suspended,  modified, 
or  set  aside  by  a  court  of  competent  jurisdiction.  In  addition 
the  Commission  might  order  an  apportionment  of  joint  rates, 
when  the  carriers  are  unable  to  agree  upon  a  division;  estabhsh 

^  Amendment  of  Section  15  of  the  law  of  1887;  see  p.  453,  supra. 


506  RAILROADS 

through  routes;  and  fix  reasonable  charges  for  services  or 
instrumentaUties  rendered  or  provided  by  shippers.  This  covers 
the  case  of  charges  for  icing  refrigerator  cars  or  for  the  use 
of  special  equipment. 

Fairly  general  rate-making  power  was  thus  conferred  upon 
the  Commission;  Umited,  however,  to  the  adjudication  of 
specific  complaints.  But  the  carriers  being  routed  at  this  point, 
promptly  fell  back  upon  a  second  line  of  defences.  Their 
representatives  took  a  stand  upon  the  directly  consequent  point 
of  broad  review  by  the  Federal  courts  of  the  Commission's 
orders.  It  was  yet  possible  to  practically  nullify  administra- 
tive control  by  according  indefinite  limits  to  the  appellate 
jurisdiction  of  these  courts.  Might  they  pass  upon  law  points 
alone;  or  were  they  to  be  empowered  to  review  the  entire  order 
of  the  Commission?  A  most  brilhant  constitutional  debate 
again  took  place  in  the  Senate.^  The  first  detail  concerned 
the  power  of  Congress  to  restrict  the  right  of  the  lower  Federal 
Courts  to  suspend  the  Commission's  orders  by  writ  of  injunc- 
tion. Any  limitation  upon  this  power  would,  of  course,  lessen 
interference  with  the  Commission's  mandates,  and  greatly  pro- 
mote a  speedy  settlement  of  transportation  disputes.  Were 
these  injunctions  to  be  freely  issued,  holding  up  the  Commis- 
sion's orders  and  thereby  leaving  the  old  rate  or  practice  in 
effect  pending  final  adjudication,  the  carriers  would,  of  course, 
then  have  everything  to  gain  and  nothing  to  lose  by  their  issu- 
ance. Every  order  might  be  attacked,  not  with  any  serious 
expectation  of  final  success,  but  merely  to  secure  the  benefit 
of  the  delay.  And  if,  after  this  delay,  the  widest  possible 
scope  of  review  were  allowed  in  the  formal  trial  of  the  case, 
judicial  instead  of  administrative  regulation  might  still  be 
brought  about. 

The  first  essential  in  the  conservative  programme,  then,  was 

1  Professor  Dixon  in  the  Quarterly  Journal  of  Economics,  XXI,  1906, 
p.  544,  has  succinctly  reviewed  this.  Cf.  American  Political  Science  Review, 
IV,  1910,  p.  547. 


THE  ROOSEVELT  LEGISLATION  507 

to  ensure  the  most  comprehensive  right  of  review  for  all  cases 
appealed.  But  could  Congress  by  statute  limit  or  define  the 
exercise  of  this  judicial  power  on  the  equity  side?  There  was 
no  doubt  as  to  its  right  under  the  Constitution  to  create  or 
abolish  Federal  courts,  other  than  the  Supreme  Court.  But 
could  it  restrict  their  judicial  functions,  legal  or  equitable, 
including  primarily  the  power  to  issue  injunctions?  Practi- 
cally, the  alternative  lay  either  in  omitting  all  reference  to  the 
subject  in  the  amended  act,  leaving  the  scope  of  the  courts' 
powers  to  be  determined  by  judicial  construction  of  the  statute; 
or  in  attempting  to  define  it  specifically,  item  by  item.  The 
carriers'  representatives  would  not  agree  to  the  former  course, 
lest  silence  upon  this  matter,  as  they  averred,  might  imperil 
the  constitutionality  of  the  law.  Nor  could  the  progressive 
reformers  refuse  a  definition  of  the  matter,  under  suspicion  of 
bad  faith.  For  if,  as  they  had  so  stoutly  maintained,  the  con- 
stitution amply  safeguarded  the  rights  of  appellants  without 
further  prescription,  a  mere  re-affirmation  of  these  rights  could 
do  no  harm.  The  result  was  a  clause  so  worded  as  virtually  to 
satisfy  the  conservatives;  while  ostensibly  being  a  compromise. 
Power  is  expressly  conferred  upon  the  Circuit  Courts,^  by  suit 
to  "enjoin,  set  aside,  annul  or  suspend"  orders  or  requirements 
of  the  Commission.  But  this  power  is  limited  by  the  condition 
that  five  days'  notice  must  be  given  to  enable  the  Commission 
to  prepare  its  case  for  protest.  And  the  hearing  must  be  had 
before  three  Federal  judges  instead  of  one.  These  details  were 
intended  to  prevent  the  issuance  of  restraining  orders  for 
frivolous  or  merely  obstructive  reasons. 

The  unfortunate  feature  of  this  compromise,  arrived  at  only 
after  weeks  of  bitter  controversy,  was  its  entire  indefiniteness 
as  to  the  grounds  upon  which  the  courts  might  base  their 
review  of  the  Commission's  orders.     It  thus  stopped  short  of 

^  By  Amendment  of  Section  16;  see  p.  453,  supra.  The  attempt  to 
insert  the  words  "fairly  remunerative"  in  place  of  "reasonable"  so  as  to 
invoke  new  judicial  tests  is  discussed  by  Smalley,  op.  cit.,  1906,  p.  59. 


508  RAILROADS 

conferring  more  liberal  powers  of  review  for  railroads  than  those 
enjoyed  under  the  constitution  by  all  other  classes  of  persons 
and  property.^  In  so  far  the  railroads  lost  their  case.  It  is 
evident  that  Congress  intended  to  create  a  really  competent 
administrative  board,  with  whose  orders  the  courts  might  inter- 
fere only  when  those  orders  were  ultra  vires,  or  unconstitutional. 
The  courts  under  the  law  must  accord  the  same  consideration 
to  such  decisions,  "if  regularly  made  and  duly  served,"  as  to 
an  act  of  Congress,  with  the  presumption  always  in  favor  of 
validity.  Judicial  interference  might  be  expected  only  when 
the  railroads  had  a  good  case.  This,  at  least,  was  a  clear  gain. 
There  was  j^et  another  even  more  important  one.  Under  the 
old  law  the  burden  of  initiative  or  proof  on  all  cases  appealed, 
rested  upon  the  Commission.  This  might  now  be  reversed. 
Penalties  formerly  did  not  begin  to  run  until  the  final  decision  of 
th.e  highest  court  to  which  appeal  was  taken,  had  affirmed  the 
validity  of  the  Commission's  order.  Carriers  might  continue 
to  disobey  with  impunity  throughout  the  period  of  protracted 
litigation.  But  now  a  penalty  of  $5,000  a  day  for  each  day's 
violation  of  the  order,  began  at  the  expiration  of  thirty  days. 
The  initiative  to  secure  relief  from  this  order  must  now  come 
from  the  carrier.  It,  and  not  the  Commission,  became  the 
petitioner  before  the  courts.  A  speedier  adjudication  of  con- 
tested cases  might  far  more  confidently  be  expected  under  such 
conditions.  But  the  grounds,  legal  or  economic,  upon  which 
such  determination  of  the  reasonableness  of  the  Commission's 
orders  must  rest,  were,  unfortunately,  as  we  have  seen,  left 
open  for  judicial  interpretation  in  the  course  of  time. 

The  railroads  won  a  decided  victory  in  one  other  bitterly 
contested  detail  of  the  relation  of  the  Commission  to  the  courts. 
The  new  law  still  left  the  old  rate  or  practice  of  which  complaint 
had  been  made,  in  effect  without  penalty  pending  the  review 

^Annals,  American  Academy  of  Political  Science,  March,  1907,  p. 
302,  deals  with  this  point.  Also,  the  able  discussion  by  Professor  Smalley, 
reprinted  in  our  Railway  Problems,  chapter  XXIV. 


THE  ROOSE\^LT  LEGISLATION  509 

of  the  case.  The  administration  bill  would  not  have  permitted 
restraining  orders  to  issue  until  the  Commission's  decision  had 
been  held  unreasonable  in  formal  review.  The  point  appears 
to  have  been  decided  by  Congress  upon  economically  unjusti- 
fiable grounds.  The  interval  of  time  between  the  Commission's 
decision  and  the  final  settlement  of  the  case  might  be  consid- 
erable. Under  the  old  conditions,  the  carriers  had  imposed 
the  burden  of  disputed  rates  upon  the  pubhc.  The  importance 
of  this  point  may  be  illustrated  by  the  fact  that  during  the 
protracted  litigation  in  the  Chicago  Terminal  Charge  case, 
finally  settled  in  1909,  the  sum  involved  for  this  period  alone 
amounted  to  $3,000,000.  Was  this  fair?  The  real  disputants 
after  all  were  not  the  government  and  the  railway  company. 
The  Commission  was  supposedly  acting  impartially  as  an 
umpire.  Such  being  the  case,  unless  it  were  shown  that  greater 
injustice  would  result  from  the  change,  the  natural  condition 
would  seem  to  be  this;  that  in  cases  of  dispute  the  decision  of 
the  umpire,  and  not  of  the  bigger  contestant,  should  prevail 
until  final  settlement  of  the  cause.  This  would  seem  to  be 
the  obvious,  the  natural  and  the  just  conclusion  from  the 
premises. 

But,  the  railroads  contended,  suppose  the  Commission  should 
order  a  rate  reduced,  as  in  the  Maximum  Freight  Rate  case; 
put  a  lower  tariff  into  effect;  and  then  the  courts  should  ulti- 
mately decide  that  the  original  rate  ought  not  to  have  been 
disturbed  at  all.  The  railroad  meantime  would  have  suffered 
a  corresponding  loss  of  revenue  on  all  traffic  carried  at  the  low 
rate.  This  would  certainly  be  a  hardship,  and  incontrovert- 
ibly  unjust.  But  would  it  be  more  so  than  that  the  shipper 
should  unjustly  have  borne  the  burden  in  the  contrary  case? 
As  matters  then  stood,  the  public  was  compelled  to  pay  the 
high  rate,  even  if  the  courts  afterward  decided  it  to  have  been 
unreasonable.  The  railway  as  an  interested  party  enjoyed  the 
benefit  of  the  doubt,  and  imposed  the  burden  of  proof  upon  the 
pubhc  at  all  times.     Would  it  not  have  been  more  in  consonance 


510  RAILROADS 

with  justice,  that  the  government,  an  impartial  umpire,  should 
temporarily  lay  the  burden  upon  that  party  against  whose 
contention  the  greatest  reasonable  doubt  existed? 

The  only  just  remedy  would  seem  to  be  one  which  would 
insure  final  recovery  for  unreasonable  rates,  by  whichever  party 
paid,  during  the  uncertain  period  of  adjudication.  One  of  the 
principal  objections  of  the  railways  to  the  proposed  change 
arose  at  this  point.  Large  corporations  are  more  responsible 
parties  at  law  than  most  individual  shippers.  Suppose,  through 
an  unjustly  low  rate,  a  railway  had  suffered  loss  of  revenue; 
could  it  as  readily  recoup  itself  by  suits  for  damages  against 
scores  of  shippers,  large  and  small,  as  could  the  latter,  in  the 
contrary  case,  recover  back  from  the  railway  company?  This 
cogent  argument  suggested  a  compromise  measure.  Why  not 
permit  the  original  railroad  rate  to  continue  in  force,  as  before, 
pending  final  adjudication;  but  require  the  carriers  to  give  bond 
for  prompt  repayment  of  any  surplus  charges  over  those  finally 
sanctioned  by  the  courts?  ^  This  would  have  left  the  business 
of  rate  making  in  railway  hands;  and  yet  have  afforded  a 
substantial   remedy  for  the   disputatious   shipper. 

The  railways  would  not  accede  to  such  a  compromise  meas- 
ure, with  all  the  financial  burdens  thereby  entailed.  Unfor- 
tunately even  this  scheme  is  woefully  short  of  a  just  solution. 
The  whole  matter  looms  up  larger  at  this  point.  Enter  again 
the  interests  of  the  real  consumer!  In  most  cases  freight  rates 
to  some  degree  affect  the  price  of  commodities.  Has  the  shipper, 
having  paid  a  freight  bill  afterward  adjudged  unreasonably 
high,  any  right  to  sue  for  recovery  of  the  amount?  Has  he  not, 
with  his  fellow  merchants,  probably  shifted  the  burden  upon 
the  public?  Evidence  shows  that  carload  rates  on  cattle  from 
Texas  to  South  Dakota  have  been  increased  within  ten  years 
after  1898,  from  sixty-five  dollars  to  one  hundred  dollars.  Prob- 
ably part  of  this  thirty-five  dollars  increase  has  been  taken  from 

^  This  procedure  has  been  actually  adopted  in  several  cases,  Ann. 
Rep.,  I.C.C,  1908,  61. 


THE  ROOSEVELT  LEGISLATION  511 

the  profits  of  the  cattlemen;  but  can  there  be  doubt  that  a  part 
of  it  has  been  added  to  the  price  of  beef?  ^  No,  tackle  it  as  you 
will,  from  whatever  point  of  view,  you  return  to  the  same 
proposition:  that  the  damage  of  an  unreasonable  freight  rate, 
once  paid,  is  irreparable.  Particular  shippers  may  recover  what 
seem  to  be  damages;  but  which  are  likely  not  to  have  been  so 
to  them  individually  at  all.^  By  standards  of  abstract  justice, 
the  real  solution  should  distribute  the  temporary  burdens 
incident  to  the  delays  of  legal  procedure,  as  nearly  evenly  as 
the  laws  of  chance  will  permit.  A  compilation  in  1905  showed 
that,  of  316  freight  rate  cases  decided  by  the  Interstate  Com- 
merce Commission,  fifty-four  per  cent.  —  practically  one  half  — 
turned  in  favor  of  the  complainant.  Inasmuch  as  these  com- 
plaints were  practically  all  brought  on  behalf  of  shippers  against 
the  railroads,  this  shows  how  evenly  balanced  the  issues  have 
been.  Were  the  orders  of  the  Commission  to  become  effective 
at  once,  the  losses  incident  to  errors  afterward  corrected  by  the 
courts,  would  be  distributed  in  about  equal  proportions.  Under 
the  law  even  as  amended  in  1906,  all  the  penalty  of  a  mistake 
falls  upon  the  shipper  and  the  public;  the  railway  always  goes 
scot  free.  An  impartial  commission  should  be  clothed  with 
power  to  distribute  these  onerous  burdens  by  prescribing  the 
temporary  rate.  Quite  possibly  the  limitation  of  the  equity 
power  of  Federal  judges  to  protect  the  railroads  in  their  con- 
stitutional rights,  might  have  been  overthroA\Ti  by  the  Supreme 
Court;  but  the  advantage  in  the  contrary  case  would  have  been 
well  worth  the  risk. 

The  only  remedy  left  for  the  public  under  the  circumstances 
of  compromise  above  outlined,  was  to  forward  the  course  of 
judicial  procedure  in  every  way.  The  Expedition  Act  of  1903 
had  done  much.     The  new  amendments  went  still  further,  by 


^  17  I.C.C.  Rep.,  317,  is  a  case  in  point  where  cotton-oil  mills  refused 
to  protect  an  advance  in  rates. 

2  C{.  13  Int.  Com.  Com.  Rep.,  668;  190  Fed.  Rep.  659;  and  U.  S. 
Commerce  Court,  1911,  193  Fed.  Rep.,  667. 


512  RAILROADS 

providing  for  appeal  directly  to  the  Supreme  Court  with  the 
privilege  of  precedence  upon  its  docket.  Other  details  served 
the  same  purpose.  Formerly  it  had  taken  much  time  for  the 
Commission  to  prepare  its  formal  orders  and  its  prima  jade 
case  for  the  courts.  All  the  evidence  had  to  be  duly  set  forth. ^ 
Except  for  damage  suits,  all  this  was  now  changed.  The  Com- 
mission in  its  orders  need  only  state  its  conclusions  in  the  prem- 
ises, without  the  delays,  labor  and  expense  incident  to  formal 
re-examination  of  witnesses  and  the  preparation  of  extended 
records  of  evidence.  This  has  materially  expedited  the  settle- 
ment of  contested  cases.  It  has  yet  another  advantage.  The 
Commission  was  stripped  of  one  of  its  semi-judicial  functions; 
always  an  anomaly  under  our  plan  of  government.  And  the 
assignment  of  the  duty  of  formal  prosecution  of  cases  on  appeal 
to  the  Attorney-General  of  the  United  States,  was  yet  another 
improvement  along  the  same  hne. 

In  the  matter  of  personal  discrimination,  the  disheartening 
persistence  of  illegal  practices,  despite  the  provisions  of  the 
Elkins  law  of  1903,  rendered  it  necessary  to  specifically  extend 
jurisdiction  of  the  Commission  over  private  car  lines;  and  to 
confer  authority  over  all  incidental  services  at  terminals. 
Separate  publication  of  storage,  icing  and  other  charges  was 
called  for;  and  railroads  were  held  responsible  for  the  provision 
of  special  equipment  when  requested.  Industrial  railroads, 
"tap  lines,"  spurs  and  sidings,  so  ingeniously  employed  in  dis- 
crimination,2  were  expressly  included  under  the  Commission's 
authority.  Passes  for  individuals,  a  fruitful  source  of  favorit- 
ism and  political  corruption  in  the  past,  were  even  more  par- 
ticularly prohibited.  The  only  exceptions  were  for  employees 
and  their  families,  the  poor  or  unfortunate,  and  persons  engaged 
in  religious  or  philanthropic  work.  In  this  connection,  it  may 
be  added  that  the  law  of  1910  somewhat  modified  this  rule  by 
enlarging  the  meaning  of  "employees"  to  include  caretakers  of 

1  CJ.  conditions  under  the  old  law;  p.  461,  supra. 

2  See  pp.  195  and  213,  supra. 


THE  ROOSEVELT  LEGISLATION  513 

milk  and  other  commodities.  It  also  dealt  ^\'ith  the  issuance 
of  franks  by  express,  telegraph  and  telephone  companies  in 
some  detail.  Superannuated  or  pensioned  employees  and  the 
bodies  of  persons  killed  in  service  might  also  be  carried  free. 
Such  details  are  significant  as  illustrating  the  extreme  nicety 
of  definition  required  by  the  drastic  character  of  the  prohibitions. 

An  important  change  was  also  made  by  the  law  of  1906  in 
re-imposing  the  penalty  of  imprisonment,  as  well  as  of  fine,  for 
departure  from  the  published  tariff.  Its  removal  from  the 
original  law  of  1887,  in  the  interest  of  effective  enforcement, 
was  recognized  as  a  mistake.  With  the  complete  affirmance 
by  the  courts  of  power  to  compel  the  production  of  evidence, 
recalcitrant  witnesses  were  now  under  control.  It  was  hoped 
that  vigorous  prosecution  with  this  criminal  punishment  added, 
might  put  an  end  to  the  abuse. 

An  entirely  new  feature  was  added  to  the  law  by  the  so-called 
"Commodity  Clause."  This  sought  to  divorce  transportation 
entirely  from  all  other  lines  of  business.  The  experience  of 
years  had  shown  that  corporations,  especially  in  the  coal-fields, 
by  combining  both  the  service  of  carrier  and  shipper,  might 
most  effectively  stifle  competition  of  independent  producers. 
Rank  discrimination  might  be  concealed  by  means  of  ingen- 
iously framed  systems  of  inter-company  accounts.  And  denial 
of  equal  facilities  such  as  cars  or  sidings  might  operate  to  drive 
competitors  out  of  the  business.  While  the  Hepburn  law  was 
before  Congress,  several  events  drew  attention  forcibly  to  the 
existence  of  such  abuses.  The  Interstate  Commerce  Commis- 
sion in  April,  acting  under  the  Tillman-Gillespie  resolution, 
uncovered  flagrant  violations  of  law  on  the  Pennsylvania 
system.^  Equally  important  was  the  decision  handed  dovm  in 
February  by  the  Supreme  Court  in  the  Chesapeake  and  Ohio 
Railroad  case.-  This  dealt  vdih  discriminatory  rates  on  soft 
coal  for  the  New  Haven  road,  given  by  means  of  manipulation 

1  Cf.  p.  199,  supra. 

2  200  U.  S.,  613:  20th  Ann.  Rep.  I.C.C,  p.  42. 
VOL.  1—33 


514  RAILROADS 

of  the  pro-rating  division  between  the  various  companies  in- 
terested. The  general  pubhc  was  also  greatly  concerned  over 
the  growth  of  monopoly  in  the  anthracite  fields  and  the  coin- 
cident rise  in  the  price  of  coal.  The  independent  producers 
in  the  soft  coal  regions  were  at  the  same  time  roused  over  the 
grievous  discriminations  practised  against  them,  especially  in 
West  Virginia.^  Senator  Elkins  of  that  state,  —  usually  a 
strong  railroad  partisan,  —  introduced  the  amendment  under 
pressure  from  his  constituents.  It  was  warmly  supported  by 
the  most  radical  administration  representatives.  For  it  was 
apparent  at  once  that  a  withdrawal  of  railroads  from  all  such 
correlated  businesses  was  not  only  proper  in  itself,  but  would 
also  greatly  promote  the  enforcement  of  many  other  provisions 
of  the  law.  Yet  the  radical  character  of  the  proposition  was 
perhaps  scarcely  appreciated.  Some  railroads,  like  the  Lack- 
awanna, were  dependent  for  nearly  three-fourths  of  their  ton- 
nage upon  the  anthracite  coal  traffic;  much  of  it  from  their 
own  mines.  The  Chesapeake  and  Ohio  in  the  eastern  fields 
and  the  'Frisco  in  the  Middle  West,  relied  upon  soft  coal  for 
more  than  half  of  their  tonnage.  A  great  many  other  carriers 
were  interested  to  a  lesser  degree.  To  compel  them  all  to  give 
up  their  coal  properties  was  indeed  a  serious  matter. 

The  "commodity  clause"  provided  that  ''after  May  1,  1908, 
it  shall  be  unlawful  for  any  railroad  company  to  transport  from 
any  state  ...  to  any  other  state  .  .  .  any  article  or  commodity 
other  than  timber  and  the  manufactured  products  thereof, 
manufactured,  mined,  or  produced  by  it,  or  under  its  authority, 
or  which  it  may  own  in  whole  or  in  part,  or  in  which  it  may  have 
any  interest,  direct  or  indirect,  except  such  articles  or  commodi- 
ties as  may  be  necessary  and  intended  for  its  use  in  the  conduct 
of  its  business  as  a  common  carrier." 

The  original  proposition  was  even  more  drastic.     It  was 
to  apply  to  all  common  carriers,  such  as  the  pipe  lines  in  the 

1  Cf.  10  I.C.C.  Rep.,  473  and  p.  640;  11  Idem  Rep.,  538;  13  Idem  Rep., 
p.  70;  19  Idem  Rep.,  356. 


THE  ROOSE\'ELT  LEGISLATION  515 

oil  business.  But  it  was  soon  considerably  modified  in  the 
course  of  passage.^  First,  it  was  limited  to  railroads.  Then 
the  western  senators,  on  behalf  of  the  lumber  industry,  secured 
its  special  exception.  And,  finally,  an  attempt  to  prohibit 
specifically  the  control  of  subsidiary  industrial  companies 
through  stock  owTiership  was  defeated.  But,  as  thus  limited, 
the  clause  finally  passed  the  Senate,  —  the  stronghold  of  the 
railroad  kiterests,  — by  a  vote  of  67  to  6.  This  affords  a  good 
indication  of  the  extent  of  popular  feeling  on  the  subject.  It 
was  fortunate  indeed  that  the  prohibition  was  not  to  take  effect 
for  two  j^ears,  in  view  of  the  htigation  necessary  for  its  precise 
interpretation.  For  in  any  event  it  was  bound  to  lead  to  much 
corporate  readjustment.  The  course  of  these  proceedings  will 
be  considered  in  the  next  chapter. 

There  remains  for  consideration  one  of  the  most  important 
provisions  of  the  Hepburn  law,  namely  that  dealing  with 
publicity  of  accounts.-  Section  twenty  of  the  law  of  1887 
called  for  the  filhig  bj^  all  carriers  of  annual  reports  with  the 
Interstate  Commerce  Commission.  These  reports  were  to  be 
standardized;  and  the  Commission  was  empowered,  in  addi- 
tion, to  demand  specific  information  whenever  it  was  so  desired. 
But  the  absence  of  express  authority  to  enforce  these  orders, 
except  by  means  of  tedious  equity  proceedings  in  the  courts, 
made  improvements  in  accountuig  almost  entirely  dependent 
upon  the  tact  and  resourcefulness  of  the  statistician.  The 
Commission  was  most  fortunate  in  the  services  of  Prof.  Henry 
C.  Adams,  who  succeeded  in  bringing  about  cordial  cooperation 
between  the  accounting  officials  of  the  railroads  and  the  govern- 
ment. Great  improvements  in  the  line  of  uniformity  resulted; 
but  the  need  of  positive  control  became  increasingly  apparent. 

1  An  excellent  account  of  the  debates  and  early  litigation  is  in  the 
Journal  of  Political  Economy,  vol.  XVII,  1909,  pp.  448-460. 

2  Fully  described  in  Quarterly  Journal  of  Economics,  vol.  XXII,  1908, 
pp.  364-38.3.  For  comparison  with  foreign  countries;  iUd.,  vol.  XXIV, 
1910,  pp.  471-500. 


516  RAILROADS 

Many  officials  were  unwilling  to  certify  by  oath  to  the  correct- 
ness of  their  returns.     With  the  increasing  size  of  the  roads, 
it  became  more  and  more  difficult  to  secure  promptness.     The 
armual  Statistics  of  Railways  had  almost  to  await  the  pleasure 
of  the  carriers  in  filing  their  statements.     And  vitally  impor- 
tant information  was  often  withheld.     In  the  case  of  the  Lake 
Shore  road,  for  example,  which  for  years  had  charged  all  its 
improvements  to  operating  expenses,  it  positively  declined  to 
state  what  portion  of  those  improvements  were  permanent  ad- 
ditions to  the  property,  properly  chargeable  to  capital  account, 
and  what  were  in  the  nature  of  renewals  and  repairs.     And  the 
Supreme  Court  had  found  no  authority  in  the  law  to  compel 
the  furnishing  of  this  information.^     With  the  growth  of  ex- 
tended systems  of  railroads,  characterized  by  the  most  involved 
methods  of  inter-corporate  accounting,  the  need  of  precise  data 
became  ever  more  imperative.     Something  more  was  evidently 
necessary  than  a  mere  expression  by  Congress  of  an  opinion 
favorable  to  publicity.     The  mandatory  provisions  added  in 
1906  to  the  Twentieth  Section  are,  therefore,  vital,  not  only 
in  themselves;  they  are  essential  to  the  administrative  enforce- 
ment of  nearly  every  other  part  of  the  regulative  law.     A  de- 
termined effort  was  made  in  1908  to  defeat  the  purpose  of  this 
clause  by  restricting  appropriations  for  carrying  it  into  effect.^ 
But  it  emerged  unscathed  —  thanks  to  President  Roosevelt  — 
and  stands  today  as  one  of  the  best   features  of  the  new 
statute. 

One  may  readily  distinguish  no  less  than  five  distinct  and 
important  special  services  to  be  rendered  by  full  publicity  of 
accounts.  The  earliest  to  be  fully  appreciated  was  its  service- 
ableness  in  securing  equality  of  treatment  of  all  shippers.  In 
the  good  old  freebooters'  days,  rebates  were  probably  openly 
entered  as  such  on  the  books.  But  with  the  need  of  conceal- 
ment, they  came  to  be  covered  up  in  all  sorts  of  ways;  often- 

1 197  U.  S.,  536. 

*  Munsey's  Magazine,  March,  1912,  well  outlines  it. 


THE  ROOSEVELT  LEGISLATION  517 

times  under  such  guises,  as  in  the  notable  Atchison  case,  in  such 
manner  that  not  even  the  directors  knew  what  they  meant. 
With  full  standardization  of  accounts,  such  abuses  may  readily 
be  detected  and  the  offenders  traced  and  punished.  In  the 
second  place,  open  standardization  of  the  books  makes  strongly 
for  more  efficient  and  honest  operation.^  The  comparative 
method  in  statistics  may  be  readily  applied;  so  that  the 
president  of  a  railroad  may  have  at  command  a  complete 
statement  of  operations  in  detail,  which  is  comparable  not 
only  with  his  own  results  in  preceding  years  but  with  other 
roads  similarly  circumstanced.  The  haphazard  and  unscien- 
tific methods  of  operation  in  the  British  Isles  are  largely  a 
resultant  of  the  absence  of  any  logical  and  uniform  system  of 
public  accounts.^ 

Detailed  cost  keeping  in  the  management  of  great  systems 
of  inter-related  railroads,  being  absolutely  essential  to  efficiency, 
makes  also  for  honesty  in  operation.  Such  gross  frauds  as  de- 
veloped upon  the  Illinois  Central  in  1910,  variously  estimated 
to  have  cost  the  road  from  $2,500,000  to  $5,000,000  through 
overcharges  for  equipment  repairs,  might  readily  enough  have 
been  detected  under  an  efficient  and  honest  management.  This 
instance  immediately  suggests  a  third  advantage  of  full  publicity 
of  accounts,  namely  the  protection  of  investors.  Flagrant 
manipulation  of  maintenance  accounts,  "skinning"  or  "fatten- 
ing" roads  in  the  interest  of  inside  speculators,  has  always  been 
dependent  upon  secrecy.  Assurance  of  a  stable  market  for 
railroad  securities,  based  upon  entire  frankness  as  to  the 
degree  to  which  these  properties  are  beuig  kept  whole  or 
improved,  is  one  of  the  prime  advantages  which  may  be 
expected  to  flow  from  such  governmental  prescription  of 
accounts.     And  general  public   confidence  in  railway  invest- 


*  Cf.  Scientific  Management  in  Railroad  Operation;  Quarterly  Journal 
of  Economics,  vol.  XXV,  1911,  pp.  539-562.  Our  second  volume,  it  is 
hoped,  will  afford  some  idea  of  this  comparative  method. 

^  Quarterly  Journal  oj  Economics,  1912,  p.  536,  outlines  the  new  law. 


518  RAILROADS 

ments  cannot  conceivably  be  better  encouraged  than  by  such 
publicity.  In  no  other  detail  than  this,  does  the  Act  to 
Regulate  Commerce  more  directly  benefit  the  general  body 
of  stockholders  in  railroads,  as  well  as  the  corporations 
themselves. 

The  three  foregoing  advantages  of  pubHcity  had  been  long 
appreciated.  These  recent  changes  introduced  in  the  Federal 
law  brought  two  others  into  special  prominence.  One  is  the 
newly  assumed  responsibility  by  the  government  in  the  matter 
of  rate  making.  The  other  is  its  intervention  in  cases  of  dis- 
pute between  the  carriers  and  their  employees.  In  both  cases 
it  is  imperative  that  there  should  be  available  data  for  a  just 
determination  of  the  issues  at  stake.  There  must  be  assurance 
that  every  essential  feature  of  the  situation  is  fully  and  fairly 
set  forth  upon  the  books.  Otherwise,  as  in  disputed  rate  cases, 
every  fact  as  to  cost  of  service,  —  a  primary  basis  of  measure- 
ment, —  is  vitiated.  Absurd  and  misleading  calculations  may 
be  presented  in  evidence,  which  greatly  hamper  the  government 
in  deciding  the  case.^  And  now  with  the  projected  physical 
valuation  of  properties  as  an  element  in  rate  making,  all  of  the 
factors  of  maintenance,  betterment  and  depreciation,  of  joint 
facilities,  rentals  and  sinking  funds  must  be  taken  into  account. 
In  labor  disputes,  the  same  considerations  apply.^  Under  the 
requirements  of  the  Erdman  Act,  every  mediation,  —  and  the 
need  for  it  is  more  frequent  every  year,  —  calls  for  critical 
analysis  by  the  chairman  of  the  Commission  and  the  Federal 
commissioner  of  labor  of  the  statements  from  both  sides 
as  to  the  reasonableness  of  the  action  to  be  taken  respect- 
ing wages  or  conditiong  of  employment.^  The  notable  arbi- 
tration in  1912  is  the  most  important  instance  as  yet.  Having 
all  of  these  services  in  mind,  it  seems  likely  that  the  account- 

»  The  Meeker  case  in  1911,  concerning  the  cost  of  transporting  coal  to 
tidewater  by  the  Lehigh  Valley,  is  a  good  illustration.     21 1.C.C.  Rep.,  144. 

^  Cf.  Bulletin  U.  S.  Bureau  of  Labor,  No.  98,  1912. 

» Cf.  Standardization  of  Wages  of  Railroad  Trainmen;  Quarterly 
Journal  of  Ecojiomics,  XXV,  1910,  pp.  139-160. 


THE  R00SE\T:LT  legislation  519 

ing  provisions  added  to  the  law  in  1906  will  be  second  to 
none  in  bringing  about  the  elimination  of  existing  evils,  and 
in  standardizing  and  improving  operation,  finance  and  traffic 
practice. 

Under  the  new  law  monthly  and  special  as  well  as  annual 
reports,  might  be  required  under  oath;  with  appropriate  penal- 
ties of  fine  and  imprisonment  for  delay  or  mis-statement.  All 
accounts  must  be  kept  according  to  forms,  general  and  detailed, 
prescribed  by  the  Interstate  Commerce  Commission.  Such 
rules  applied  of  course  to  all  carriers  subject  to  the  law,  such  as 
express  and  sleeping-car  companies,  pipe  lines  and  even  water 
carriers  where  operated  in  connection  with  railroads.  IVIore- 
over,  the  Commission  was  to  have  access  to  the  books  at  all 
times.  For  this  purpose,  it  might  employ  special  examiners.^ 
In  other  words,  the  system  employed  for  years  in  connection 
with  the  regulation  of  national  banks,  was  now  extended  to  the 
interstate  carriers.  An  additional  safeguard  was  provided  in 
the  clause  which  made  it  unlawful  to  keep  any  other  accounts 
books  or  memoranda  than  those  approved;  with  the  same 
penalties  for  violation.  In  brief,  the  policy  was  now  perfectly 
definite.  Carriers  were  rendered  public  service  companies  in 
every  sense  of  the  word.  Mere  indefinite  publicity  was  replaced 
by  specific  regulation.  This  policy  was  not  only  clearly  written 
in  the  law;  but  the  Commission  in  promulgating  its  orders 
relative  to  accounting,  laid  upon  every  officer  concerned,  full 
personal  responsibility  for  the  statements  rendered.  Minor 
officials,  made  scapegoats  for  chief  offenders,  were  no  longer  to 
be  tolerated.  The  relation  between  agent  and  principal  was 
clearly  defined.  It  was  assumed  that  so  far  as  accounts  were 
concerned,  such  officials  were  representatives  of  the  Commission 
in  carrying  out  the  law.  A  new  principle  was  introduced  in 
the  regulation  of  carriers  which  could  not  fail  to  be  produc- 
tive of  great  good.     In  this  respect  the  Hepburn  amendments 

^  Munsey's  Magazine,  March,  1912,  p.  7,  outlines  the  attempt  in  1908 
to  defeat  this  provision  by  withholding  appropriations. 


520  RAILROADS 

granted    all    that    the    most    ardent    advocates    of    publicity 
demanded.^ 

A  summary  view  of  this  important  legislation,  —  in  form 
merely  an  amendment  of  the  original  law  of  1887,  but  in 
reality  constituting  an  entirely  new  departure,  —  may  now  be 
had.  The  gains  for  effective  regulation  were  considerable. 
Among  them  may  be  noted  its  enlarged  field,  the  separation 
of  transportation  from  other  businesses,  elimination  of  the 
iniquitous  railroad  passes,  control  over  joint  rates  and  pro- 
rating, the  expedition  of  judicial  procedure,  full  publicity  of 
accounts,  enhancement  of  the  dignity  and  compensation  of  the 
Commission,  and,  most  important  of  all,  the  grant  in  so  many 
words  of  administrative  rate-making  power.  The  carriers  — 
and  the  administration  also  —  failed  to  obtain  the  much- 
desired  repeal  of  the  prohibition  of  pooling.  On  the  other 
hand,  as  against  these  gains  for  reform  should  be  set  the 
following  concessions  to  the  railroads.  Rate-making  control 
was  still  subject  to  broad  court  review.  No  one  as  yet  knew 
what  this  might  bring  forth.  Maximum  rates  only  might  be 
prescribed.  And  much  as  to  the  proper  relativity  of  rates, 
involved  both  in  matters  of  freight  classification  and  of 
enforcement  of  the  long  and  short  haul  clause,  was  left  un- 
touched. Rate  advances  were  still  possible  without  determina- 
tion of  their  reasonableness  in  advance.  Suspension  of  orders 
pending  judicial  review,  still  remained.  There  was  as  yet 
no  control  over  physical  operation,  such  as  furnishing  cars, 
although  switches  might  be  ordered.  Many  of  the  states  had 
long  since  undertaken  this  work.  And  the  great  body  of  in- 
dependent carriers  on  our  inland  waters  were  still  left  beyond 
the  reach  of  the  Federal  law.  In  the  main,  the  administration 
had  won  a  notable  victory,  although  at  some  considerable  cost. 
The  principle  of  effective  regulation  of  public-service  carriers 

1  The  affirmance  of  these  powers  by  the  Supreme  Court  in  1912  is 
described  at  p.  58G,  infra. 


THE  ROOSEVELT  LEGISLATION  521 

had  been,  indeed,  vigorously  affirmed  in  no  mistakable  terms. 
But  the  task  was  not  yet  completed.  Many  details  of  law  were 
needed  to  "CHnch  the  Roosevelt  poHcies."  Nevertheless,  it 
was  probably  better  that  a  brief  experience  with  the  new  law, 
both  among  the  people  and  in  the  courts,  should  precede  further 
legislation.  Great  reforms  should  not  be  too  suddenly  effected, 
else  reaction  is  certain  to  take  place.  For  the  time  being  a 
positive  step  forward  had  been  taken. 


CHAPTER  XVI 

EFFECTS  OF  THE   LAW   OF   1906;    JUDICIAL 
INTERPRETATION,  1905-'10 

Large  number  of  complaints  filed,  522.  —  vSettlement  of  many  claims,  524. 

—  Fewer  new  tariffs,  525.  —  Nature  of  complaints  analyzed,  526.  — 
Misrouting  of  freight,  527.  —  Car  supply  and  classification  rules,  527. 

—  Exclusion  from  through  shipments,  529.  —  Opening  new  routes, 
530.  —  Petty  grievances  considered,  530.  —  Decisions  evenly  balanced, 
532.  —  The  banana  and  lumber  loading  cases,  532.  —  Freight  rate 
advances,  534.  —  General  investigations,  536. 

Supreme  Court  definition  of  Commission's  authority,  538.  —  The  lUinoia 
Central  car  supply  case,  538.  —  Economic  v,  legal  aspects  considered, 
540.  —  The  Baltimore  and  Ohio  decision,  541.  —  The  Burnham, 
Hanna,  Munger  case,  542.  —  The  Pacific  Coast  lumber  cases,  543. — ■ 
Decisions  revealing  legislative  defects,  546.  —  The  Orange  Routing 
case,  546.  — ■  The  Portland  Gateway  order,  547.  —  The  Commission's 
power  to  require  testimony  affirmed,  549.  —  The  Baird  case,  549.  — 
The  "Immunity  Bath"  decision  and  the  Harriman  case,  550.  —  In- 
terpretation of  the  "commodity  clause,"  552.  —  Means  of  evasion 
described,  553. 

The  first  direct  effect  of  the  new  law  was  a  great  increase  in 
the  volume  of  business  of  the  Interstate  Commerce  Commission. 
Within  two  years  over  nine  thousand  appeals  were  made  to  it 
in  one  form  or  another  for  the  adjustment  of  transportation  dis- 
putes. The  overwhelming  majority  of  these  complaints  were 
settled  informally  out  of  court ;  and  in  this  work  of  conciliation 
one  of  the  m.ost  conspicuous  and  beneficial  functions  of  the 
new  commission  appears.  But,  nevertheless,  an  increasing 
number  of  grievances  seem  to  have  required  a  formal  hearing 
and  decision  of  record.  Some  indication  of  the  public  relief 
sought  is  afforded  by  the  fact  that  within  approximately  the 
first  two  years  and  a  half,  —  up  to  August  28,  1908,  —  1053 
cases  on  the  formal  docket  were  disposed  of,  leaving  over  five 
hundred  issues  still  undecided.  As  compared  with  this  total 
of  over  fifteen  hundred  formal  complaints  under  the  new  law, 


EFFECTS  OF  LAW  OF   1906 


523 


the  number  filed  under  the  old  statute  amounted  to  only  878 
throughout  the  long  period  of  eighteen  years. ^  Moreover,  the 
number  of  complaints  filed,  steadily  increased  for  several  years. 


4500 


/890    '9Z       '34       '96       'S"?      /SOO    '02- 


4      '06       'oe      J9J0 


The  accompanying  diagram  well  illustrates  the  great  revival  of 

interest  which  took  place.     The  two  curves  show  respectively 

the  number  of  formal  complaints  by  administrative  years  since 

1  Cj.  the  record  for  1898-1900  at  p.  486,  m-pra. 


524 


RAILROADS 


1892,  and  the  total  of  both  formal  and  informal  ones  since  1903. 
The  sudden  increase  after  the  new  laAV  went  into  effect  in  1906, 
is,  of  course,  presaged  by  some  accession  of  business  during 
the  preceding  two  years  of  public  discussion.  But  the  results 
for  the  year  1907  first  fully  reflect  the  new  conditions.  From 
65  formal  complaints  and  568  informal  ones  filed  in  1905,  the 
numbers  in  each  class  rose  within  two  years  to  415  and  5,156, 
respectively.  It  appears,  however,  that  the  chmax  was  soon 
attained.  Since  1908,  the  number  of  formal  complaints  con- 
siderably declined;  and  the  informal  ones  seemed  to  be  about 
stationary  in  nmnber.  This  was  of  course  to  be  expected. 
The  accumulated  grievances  of  past  years  had  been  largely 
cared  for.  And  the  improved  conditions  brought  about  were 
less  productive  of  new  sources  of  trouble. 

Delay  in  settlement  of  claims  for  damages  by  shippers  has 
long  been  a  great  source  of  discontent.  The  Commission  has 
grappled  with  this  problem  vigorously.  The  following  table 
shows  what  has  already  been  accomplished.  The  figures  are 
for  administrative  years,  as  covered  by  the  annual  reports  to 
Congress. 


1907 
1908 
1909 
1910 
1911 


Number  of  claims  filed 


561 
3789 
4406 
5103 
5653 


Number  denied 


1486 

1199 

1463 

739 


Reparation  awarded 


$104,700 
154,703 
311,978 
404,976 
329,388 


Here,  again,  it  appears  as  if  the  maximum  load  had  been  reached, 
so  far  as  the  Commission  is  concerned.  Testimony  of  shippers 
is  emphatic  upon  this  point.^  One  railroad  traffic  manager 
stated  that  the  number  of  overcharge  claims  against  his  line,  — 
one  of  the  most  important  in  the  country,  —  was  twenty-five 
per  cent,  less  in  1909  than  two  years  earlier;  and  that  loss  and 
1  Annual  Report  I.C.C,  1909,  p.  11. 


EFFECTS  OF  LAW  OF   1906  525 

damage  claims  were  reduced  approximately  one-third.  A  very- 
large  shipper  compared  his  former  "claims  suspense  account," 
sometimes  amounting  to  $100,000,  with  $7,500  for  1909.  The 
number  of  such  overcharge  claims  was  1,008  in  1905.  For  nine 
months  of  1909  it  was  205.  And  yet  these  damages  paid  are 
but  a  trifle,  as  compared  with  the  aggregate  of  claim  settlements 
made  by  the  roads  directly.  For  the  fiscal  year  to  June  30,  1910, 
such  settlements  made  to  shippers  directly  by  steam  roads 
amounted  to  $21,941,232.  How  much  of  this  sum  was  a  legiti- 
mate allowance  for  loss  or  damage  incurred  in  transit,  one 
cannot  discover.  But  it  appears  likely  that  an  appreciable 
fraction  served  as  a  cover  for  personal  discrimination.  Com- 
pulsory reference  to  the  government  of  all  such  claims  would 
speedily  determine  the  true  facts.  In  the  meantime  it  is  a 
satisfaction  to  know  that  a  competent  tribunal  now  exists,  to 
which  appeal  with  a  minimum  of  expense  may  be  made  by 
aggrieved  shippers.  Furthermore,  it  should  also  be  noted  in  this 
connection,  that  the  situation  as  respects  claims  has  been  bene- 
fited by  a  detail  of  the  law  of  1906,  not  heretofore  mentioned. 
The  so-called  Carmack  amendment  provided  that  carriers  must 
issue  a  through  receipt  or  bill  of  lading,  and  thereby  become 
hable  for  the  shipment  throughout  its  entire  journey;  that  is 
to  say,  whether  upon  the  initial  road  or  a  later  connection. 
The  legal  principles  accepted  in  England  since  1841  are  thus 
adopted.  There  is  no  doubt  that  great  improvement  in  the 
relation  between  the  roads  and  the  shipping  public  may  be 
anticipated  as  a  result. 

The  great  improvement  in  respect  of  standardization  of  rates, 
evidenced  primarily  through  reduction  in  the  number  of  separate 
tariffs  issued  by  the  railroads,  has  been  elsewhere  described^  in 
connection  with  classification.  From  193,900  separate  sched- 
ules in  1906  to  less  than  half  that  number  five  years  later  is  a 
notable  achievement,  —  so  notable  indeed  that  it  merits  repeti- 
tion in  this  connection.     The  course  of  complaints,  of  claims 

1  P.  324,  supra. 


526  RAILROADS 

and  of  new  rates  filed  at  Washington,  affords  cumulative 
evidence  of  the  great  improvement  in  conditions  which  the  new 
legislation  has  brought  about. 

This  activity  of  the  Interstate  Commerce  Commission,  it 
is  almost  needless  to  mention,  affords  no  true  measure  of  the 
benefits  resulting  from  the  law.  Like  every  other  sound  piece 
of  legislation,  it  was  intended  to  be  preventive,  not  punitive. 
The  number  of  arrests  by  the  police  affords  no  indication  of  the 
effectiveness  of  a  criminal  statute.  Not  the  violations  of  law, 
but  the  breaches  forestalled,  are  of  real  significance.  And 
similarly  in  this  instance,  one  surely  finds  the  primary  benefit 
of  legislation,  not  in  the  complaints  preferred,  but  in  the  fact 
that,  under  the  improved  relationship  between  the  principals 
concerned,  many  long-standing  causes  of  irritation  and  mis- 
understanding are  being  removed.  The  real  gain,  not  to  be 
measured  by  figures,  is  to  be  found  in  the  improved  spirit  of  the 
intercourse  now  prevalent  between  railway  officials  and  their 
customers.  The  shipper  —  especially  if  he  be  a  small  one  — 
having  business  to  transact,  may  now  be  sure  of  courteous  treat- 
ment and  a  prompt  and  probably  just  outcome.  In  the  old 
days  he  was  too  often  made  to  feel  his  utter  economic  depend- 
ence. As  a  high  traffic  official  recently  put  it:  "One  reason 
we  do  not  like  this  law  is  because  we  have  to  stop  and  think 
twice  what  we  are  about.  We  must  be  ready  to  explain  and 
show  a  warrant  for  every  act.  An  attack  of  indigestion  cannot 
any  longer  serve  as  an  excuse  for  an  arbitrary,  off-hand  ruling." 
This  improved  spirit  has  permeated  the  whole  staff  of  railway 
officials  who  have  seen  a  new  light  on  the  public  aspect  of  their 
calling.^ 

The  nature  of  the  complaints  before  the  Interstate  Com- 
merce Commission,  with  its  amplified  powers  under  the  new 

1  16  I.C.C.  Rep.,  276,  is  a  typical  instance  of  voluntary  correction  of 
a  mal-adjustment  of  rates,  as  soon  as  attention  was  officially  called  to  it. 
Also,  21  Idem  where  several  railroads  being  unable  to  agree  upon  the  classi- 
fication of  live  and  dead  locomotives,  appeal  to  the  Commission  to  decide 
the  matter. 


EFFECTS  OF  LAW  OF   1906  527 

law,  affords  the  best  indication  of  the  most  important  feature 
of  its  work,  namely  the  settlement  of  disputes  between  the  rail- 
roads and  their  clients.^  And  it  will  be  apparent  that  a  large 
number  of  these  only  indirectly  raise  the  issue  of  the  actual 
freight  rate.  Oftentimes  they  concern  rather  the  manner  of 
conducting  business.  An  attentive  perusal  of  these  decisions 
of  the  Commission  offers  interesting  evidence  of  the  range  of  a 
carrier's  activities.  Every  little  station  all  over  the  country 
between  Aaron  and  Zuwash,  and  every  conceivable  commodity, 
from  "mole-traps  in  crates"  to  ''jewelers'  sweepings,"  is  com- 
prehended. The  fact  that  these  disputes,  often  pecuniarily 
insignificant,  could  not  be  amicably  adjusted  by  the  good  offices 
of  the  Commission  uiformally,  but  necessitated  formal  hearing 
and  decision,  is  the  strongest  possible  proof  that  some  competent 
tribunal  of  this  sort  was  greatly  needed  in  the  interest  of  indus- 
trial peace. 

One  of  the  commonest  petty  complaints  is  of  misrouting  of 
freight.  Goods  are  carried  by  a  roundabout  way,  or  by  one  not 
enjoying  the  lowest  through  rate.  Thus,  to  be  specific,  in  1908 
six  carloads  of  print-paper  were  shipped  from  Little  Falls, 
Minnesota,  to  Boise,  Idaho.-  Three  routes  were  open,  the  rates 
being  respectively  $1.30,  $1.36,  and  $2.17  per  hundred  pounds. 
The  Northern  Pacific  road,  in  absence  of  instructions,  sent  the 
goods  by  the  third  route,  —  presumably  the  one  most  profitable 
to  itself,  —  the  result  being  a  freight  rate  $1,760.62  greater 
than  it  otherwise  might  have  been.  Reparation  to  this  am.ount 
was  granted  within  three  months  by  order  of  the  Commission. 

Another  frequent  difficulty  concerns  the  supply  of  suitable 
cars  for  the  needs  of  the  shipper.  Carload  rates  are  always 
proportionately  lower  than  charges  for  package  shipment.^ 
The  carriers  very  properly  prescribe  a  certain  minimum  lading 
as  a  requisite  for  the  grant  of  these  proportionately  lower  whole- 

»L.  G.  McPherson,  Railroad  Freight  Rates,  1909,  pp.  275-300, 
examines  these  topically,  but  without  individual  detail. 

2 12  I.C.C.  Rep.,  62(3.  '  CJ.  p.  325,  injra,  on  classification. 


528  •  RAILROADS 

sale  rates.  The  shipper  at  carload  rates  must,  however,  pay 
for  the  full  capacity  of  the  car,  whether  his  shipment  fills  it  or 
not.  No  exception  can  be  taken  to  this  practice,  unless  the 
carrier  is  unable  or  unwilling  to  supply  cars  of  a  suitable  size. 
This  sometimes  happens.  For  instance,  in  1908  a  lumber- 
man in  Oregon,  having  a  shipment  of  39,500  pounds  to  make 
to  a  point  in  Pennsylvania,  requested  of  the  Southern  Pacific 
a  car  of  40,000  pounds  capacity.^  Not  having  one  at  hand,  a 
much  larger  car  was  furnished,  having  a  minimum  capacity 
of  60,000  pounds.  Following  the  standing  rule  as  to  carload 
rates,  the  shipper  was  compelled  to  pay  sixty-two  and  one-half 
cents  per  hundred  pounds  on  the  marked  capacity  of  the  car, 
that  is  to  say,  on  20,000  pounds  more  freight  than  he  actually 
shipped.  This  made  a  difference  of  $128.12  in  the  freight  bill 
—  nearly  fifty  per  cent,  in  excess  of  the  charge  based  upon  the 
actual  shipment.  The  Commission  issued  its  order  for  repara- 
tion within  five  weeks  of  the  filing  of  the  complaint. 

A  flagrant  case  of  the  misapplication  of  similar  rules  was 
recently  decided.^  A  retail  druggist  at  Douglas,  North  Dakota, 
bought  a  sheet  of  plate  glass  eight  feet  square  at  St.  Paul  for 
forty-six  dollars.  Usually  such  large  sheets  have  to  lie  flat 
on  the  car  floor;  and,  occupying  so  much  space,  are  properly 
assessed  at  a  minimum  weight  of  five  thousand  pounds,  regard- 
less of  the  actual  lading.  But  in  this  instance  the  glass  was 
carried  upright,  screwed  to  the  end  of  the  car,  along  with  a  lot 
of  miscellaneous  freight.  Applying  the  standard  rule  made  the 
freight  bill  for  a  distance  of  587  miles,  $9.50  more  than  the 
entire  cost  of  the  glass  at  St.  Paul.  It  appears  strange  that 
the  carrier  should  have  permitted  so  clear  a  case  to  come  to  a 
formal  hearing  at  all.  Presumably  it  contested  it  as  much  for 
the  protection  of  its  standard  rules  as  for  the  sake  of  the 
actual  revenue  involved.  No  exception  can  be  taken  to  these 
shipping  rules  as  a  whole;  but  these  cases  make  it  evident 

'  14  I.C.C.  Rep.,  561.  Another  case  of  this  sort  decided  for  the  rail- 
road is  in  15  I.C.C.  Rep.,  160.  ^  15  i.c.C.  Rep.,  301. 


EFFECTS  OF  LAW  OF   1906  529 

that  their  application  may  be  at  times  too  harsh  and  rigid. 
The  tribunal  established  by  the  new  law  performs  a  much- 
needed  service  to  the  community  in  tempering  their  applica- 
tion in  exceptional  instances. 

Attempts  at  arbitrary  exclusion  from  participation  in 
through  shipments,  in  order  to  stifle  competition,  not  infre- 
quently crop  out  in  these  decisions.  In  1905  the  Enterprise 
line,  capitalized  at  four  hundred  thousand  dollars,  put  three 
steamers  into  commission  from  Fall  River  to  New  York.^  This 
independent  line  was  of  the  utmost  importance  to  the  cotton 
manufacturers,  as  it  was  expected  that  at  New  York  connection 
could  be  made  with  competing  rail  and  water  lines  to  every  part 
of  the  United  States.  But  all  these  lines,  presumably  at  the 
behest  of  the  New  York,  New  Haven  and  Hartford  Railroad, 
which  had  hitherto  enjoyed  a  monopoly  of  the  business  and 
which,  with  its  enormous  tonnage  of  high-grade  freight  to  be 
parcelled  out  among  connecting  lines  at  New  York,  was  a  for- 
midable factor,  promptly  declined  to  join  in  making  any  through 
rates.  All  their  local  rates  from  New  York  on,  were,  of  course, 
prohibitory.  In  one  instance,  while  the  through  rate  accorded 
to  the  shipper  over  the  New  Haven  road  was  sixteen  and  five- 
eighths  cents  per  hundredweight  from  New  York  on,  the  patron 
of  the  Enterprise  line  was  charged  twenty-five  and  one-half 
cents  for  the  same  service. 

This  case  recalls  a  similar  one  in  1897,  when  the  independent 
Miami  line  of  steamers  from  New  York  tried  to  break  the 
monopoly  held  by  the  steamship  lines  owned  by  the  raikoads 
out  of  Galveston,  Texas.  The  roads  not  only  refused  to  pro- 
rate, but  actually  demanded  prepayment  of  freights  from 
Galveston  on,  as  local  rates.  The  Federal  courts  tinl^ered  with 
the  subject  for  a  while,  until  the  Circuit  Court  of  Appeals,  while 
recognizing  a  probable  violation  of  law,  affirmed  that  suit  could 
be  legally  instituted  only  by  the  United  States. ^    Meantime, 

1  21st  Annual  Report,  I.C.C,  p.  71:  12  I.C.C.  Rep.,  326. 

2  86  Fed.  Rep.,  407. 
VOL.  I — 34 


530  RAILROADS 

of  course,  the  company  was  forced  out  of  that  business;  and 
rates  have  steadily  risen  ever  since.  In  this  later  instance  of 
the  Enterprise  line,  the  Commission  promptly  ordered  an  ex- 
tension of  the  same  privileges  to  the  independent  line  that  were 
enjoyed  by  its  powerful  rival. ^ 

The  frequency  of  complaints  as  to  the  supply  of  equipment 
needed  for  the  regular  operation  of  mills  or  mines,  has  already 
been  noted.  There  may  be  enough  cars;  but  they  may  be  sup- 
plied too  irregularly. 2  And  petitions  for  the  issuance  of  through 
rates  or  the  opening  of  new  routes  became  so  common  that  a 
substantial  amplification  of  the  law  in  1910,  as  we  shall  see,  was 
effected  in  this  regard.  The  carriers,  of  course,  always  prefer 
in  case  of  a  choice  of  routes,  to  take  the  longest  possible  haul 
over  their  own  lines.  This  operates  to  close  the  more  direct  way. 
The  northern  transcontinental  lines  got  more  revenue  from 
traffic  which  went  east  over  their  lines  a  thousand  miles  by  way 
of  Spokane,  than  when  it  was  turned  over  to  a  rival  line  at 
Portland,  Oregon,  after  a  haul  by  them  of  only  one  hundred  and 
fifty  miles. ^  Even  in  1907,  at  the  time  of  extreme  congestion 
of  the  Northern  Pacific  main  line,  when  it  was  literally  over- 
whelmed with  business,  the  lumbermen  complained  that  they 
could  find  no  relief  by  these  other  routes.^  Much  the  same 
question  was  raised  in  another  way  in  1909,  by  a  complaint 
from  growers  and  shippers  of  grain  against  the  rate  adjustment 
which  forced  or  attracted  Kansas  grain  to  the  Kansas  City  mar- 
ket, instead  of  permitting  it  to  move  on  lower  rates  directly 
from  the  point  of  origin  to  the  Gulf  ports  for  export,  and  to 
Texas  milling  and  consuming  points.^  In  this  instance,  how- 
ever, the  shippers  failed  to  make  out  a  good  case;  so  that  the 
complaint  was  dismissed. 

No  grievance  is  too  petty  to  receive  consideration.    A  peach- 

1  21  I.C.C.  Rep.,  651;  is  an  odd  instance  of  a  broken  deadlock  between 
carriers  as  to  furnishing  equipment  for  completing  a  shipment. 
2 1.5  I.C.C.  Rep.,  160.     Cf.  p.  538,  infra. 
3  12  I.C.C.  Rep.,  21,  and  23  Idem,  263. 
*  14  I.C.C.  Rep.,  51.  5 15  I.C.C.  Rep.,  491. 


EFFECTS  OF  LAW  OF   1906  531 

canner  in  Martinsdale,  Georgia,  is  awarded  reparation  of  $8.91 
on  a  shipment  of  three  cars  of  his  wares.^  The  sum  of  $11.84  is 
awarded  to  a  complainant  for  an  overcharge  on  eleven  rolls  of 
old  worn-out  canvas,  assessed  for  freight  rates  as  cotton  goods 
instead  of  junk,  which  it  properly  was.-  Or  in  another  case, 
where  a  small  boiler  was  shipped  from  Kalamazoo  to  Blue 
Mounds,  Michigan,  on  a  combination  of  local  rates,  when  it 
was  properly  entitled  to  a  joint  through  rate,  an  award  of  $6.87 
to  the  shipper  followed.^  It  makes  no  difference  whether  the 
welfare  of  a  great  territory  or  the  smallest  dealer  is  concerned. 
It  is  all  one  to  the  government.  The  Hope  Cotton  Seed  Oil 
Company  ^  in  the  South,  shipped  seventeen  carloads  of  one 
season's  product  in  1907  out  over  a  certain  road,  on  a  low 
through  rate.  The  railroad  agent  was  then  informed  that  these 
shipments  interfered  with  the  policy  of  establishing  new  indus- 
tries of  this  sort  on  another  line;  and  the  through  rate  was  can- 
celled. This  jumped  the  charges  from  seventeen  and  one-half 
cents  per  hundredweight  to  sixty-seven  cents,  —  almost  the 
entire  worth  of  the  cotton-seed.  Since  the  new  law  went  into 
effect,  the  Commission  has  prescribed  a  new  rate  of  thirty  cents; 
and  industrial  peace  is  the  result. 

Thus  has  the  work  of  this  tribunal  gone  on,  with  its  daily 
grist  of  opinions  on  almost  every  conceivable  phase  of  the 
transportation  business.  It  might  be  to  prescribe  that,  even 
though  inflammable,  small-lot  shipments  of  petroleum  must  be 
accepted  bj^  a  carrier  at  least  twice  every  week,  instead  of  on 
only  one  day;  that  structural  iron  might  be  stopped  off  en  route 
at  Indianapolis,^  as  it  is  at  Chicago  and  St.  Louis,  to  be  sheared, 
fitted  and  punched,  without  losing  the  benefit  of  a  low  through 
rate,  just  as  cotton  is  halted  at  the  compressor,  or  grain  is  milled 
in  transit;  that  a  definite  rate  must  be  quoted  on  jewelers' 
sweepings,^  —  the  dirt  and  waste  laden  ^\dth  particles  of  gold 

1  16  LC.C.  Rep.,  523.  "  12  LC.C.  Rep.,  307. 

2  15  I.C.C.  Rep.,  551.  *  15  LC.C.  Rep.,  370. 
3 16  I.C.C.  Rep.,  41.                             « 15  I.C.C,  Rep.,  7. 


532  RAILROADS 

destined  to  the  smelter,  —  even  though  it  expose  the  carrier  to 
the  risk  of  exorbitant  claims  for  damage  in  case  of  accident; 
that  the  railroad  was  properly  entitled  to  charge  storage  after 
six  months  on  brewer's  rice  left  on  a  wharf  pending  piecemeal 
shipment  to  purchasers;^  or  that  two  different  rates  were  con- 
temporaneously charged  on  nitrate  of  soda,  according  to 
whether  it  was  to  be  used  in  the  manufacture  of  fertilizer  or 
gunpowder.2  g^^  whatever  the  issue,  one  has  the  satis- 
fying conviction,  after  reading  the  pros  and  cons  in  the 
decisions,  not  only  that  the  matter  has  been  settled  by  a 
disinterested  and  supposedly  impartial  third  party,  but  that 
the  decision  is  endowed  with  the  beneficent  force  of  pub  he 
authority.  As  one  reads  these  decisions,  there  is  no  evidence 
of  political  log-rolling,  or  of  legal  quibbling.  They  go  straight 
to  the  point  on  the  economic  and  common-sense  issues  in- 
volved. It  is  gratifying,  moreover,  to  note  occasionally  that 
the  dispute  has  already  been  informally  settled  before  the 
Commission  has  time  to  render  its  opinion. 

By  no  means  are  all  these  decisions  in  favor  of  the  shipper. 
In  fact,  during  the  first  fourteen  months,  only  forty-six  out  of 
one  hmidred  and  seven  formal  cases  were  thus  settled.  The 
railroads  enjoy  no  monopoly  of  unfair  practices.  Indeed,  many 
of  the  rules,  the  exceptional  application  of  which  works  hard- 
ship, were  originally  provided  to  meet  some  attempt  at  fraud 
by  shippers.  They  might  be  underclassifying;  seeking  free 
storage  on  wheels  pending  sale  of  their  goods;  claiming  exorbi- 
tant damages;  or  perpetrating  any  one  of  a  thousand  petty 
meannesses  to  which  human  nature  is  liable.  One  or  two  in- 
stances of  shippers'  complaints  set  aside  as  unreasonable  may 
not  be  out  of  place. 

The  Topeka  banana  dealers  in  1908  complained  that  bananas 
en  route  from  New  Orleans  were  subject  to  an  appreciable 
shrinkage  in  weight,  amounting  to  about  six  hundred  pounds 
per   car.'     Inasmuch  as  about  fourteen  thousand  cars  were 

1 15  I.C.C.  Rep.,  280.       '  13  I.C.C.  Rep.,  G20.      '  13  I.C.C.  Rep.,  651. 


EFFECTS  OF  LAW  OF   1906  533 

being  moved  annually,  it  is  clear  that  the  aggregate  loss  of 
weight  was  considerable.  The  practice  had  been  to  weigh  the 
bananas  when  transferred  from  the  steamers  at  New  Orleans 
to  the  cars,  and  to  levy  the  freight  rate  upon  this  weight.  To 
this  the  dealers  objected,  instancing  among  other  things  the 
practice,  long  prevalent  in  the  cattle  business  where  a  similar 
loss  of  weight  in  transit  occurs,  of  charging  according  to  the 
weight  of  the  shipments,  not  at  the  initial  point,  but  at  the 
point  of  delivery.  At  first  sight  the  complaint  appears  to  be 
well  founded.  Surely  one  should  not  be  compelled  to  pay 
freight  on  a  greater  lading  than  is  carried.  But  the  Commission 
on  examination  decided  in  favor  of  the  roads.  It  was  shown 
that  the  service  was  most  exceptional  as  to  the  shipment, 
handling  and  speed;  and  it  was  held  that  the  charges  were  on 
the  whole  reasonable  and  just. 

One  of  the  most  important  issues  in  which  the  railroads  have 
won  their  contention  concerned  the  loading  of  lumber  on 
flat  cars.^  For  half  a  century  the  practice  has  been  that  the 
shipper  should  provide  his  o^\^l  lumber-stakes  and  pay  freight 
on  them  as  on  the  lumber  itself.  In  1905  the  National  Lumber- 
men's Association  tried  to  change  all  this,  and  to  impose  upon 
the  carriers  the  legal  duty  of  securing  the  loads  in  place  as  they 
do  with  many  other  commodities.  The  carriers  offered  a  com- 
promise, agreeing  to  allow  five  hundred  pounds  per  car  free  for 
the  weight  of  the  stakes;  but  refused  to  accept  responsibility 
for  safely  stowing  the  goods.  The  Commission,  finally,  after 
prolonged  inquiry  by  experts,  relieved  the  carriers  of  this  care 
and  expense. 

It  is  undeniable  also  that  the  carriers  have  found  solace  in 
certain  unforeseen  ways  under  the  amended  law.  The  rigid 
prohibition  of  all  favors  and  rebates  has  substantially  raised 
the  general  level  of  charges,  so  general  was  the  practice  of  cut- 
ting rates  a  few  years  ago.  To  be  sure,  this  increase  has  affected 
principally  the  large  shippers,  thus  tending  to  equalize  oppor- 
1  14  I.C.C.  Rep.,  154. 


534  RAILROADS 

tunity  between  all  grades  of  competitors.  But  over  and  above 
this,  the  prohibition  of  any  act  tainted  with  favoritism  has  en- 
abled the  carriers  successfully  to  withstand  many  leakages  of 
revenue.  Claims  for  damages  can  be  plausibly  denied  on  the 
ground  that  their  settlement  might  arouse  suspicion,  and  pos- 
sibly lead  to  prosecution  for  the  grant  of  individual  favors. 
Many  roads  have  also  actually  augmented  their  revenues  by 
this  same  line  of  argument.  The  custom  of  charging  a  merely 
nominal  rental  of  one  dollar  for  freight-sheds,  other  buildings 
or  land  used  for  side-tracks  or  elevators,  was  formerly  general. 
It  would  have  been  awkward  to  place  these  contracts  on  a 
strictly  commercial  basis,  especially  where  the  tenants  were 
shippers  with  the  option  of  resorting  to  a  rival  line.  But  on 
the  plea  that  a  continuance  of  these  nominal  rentals  might  be 
considered  a  criminal  act  of  favoritism,  substantial  increases  of 
revenue  have  been  obtained.  On  one  road  alone  over  three 
thousand  of  these  nominal  rentals  have  been  raised  to  strictly 
commercial  figures.  The  aggregate  increase  of  revenue  from 
this  source  has  been  by  no  means  inconsiderable. 

A  very  important  group  of  cases  brought  before  the  Inter- 
state Commerce  Commission  under  the  new  law  concerned  the 
reasonableness  of  the  various  freight-rate  advances  which  were 
occurring  all  along  the  line.^  This  raised  a  question  as  to  the 
absolute  fairness  of  the  new  rates  as  against  the  interest  of  the 
general  public.  One  conclusion  is  certain.  The  new  law  did 
not  prevent  the  carriers  from  persisting  in  a  policy,  adopted 
nearly  ten  years  earlier,  after  a  generation  of  steadily  declining 
rates,  of  quite  generally  putting  up  their  charges.  Unfortu- 
nately, the  law  of  1906  was  defective  in  making  no  provision  for 
dealing  adequately  with  such  cases.  The  Interstate  Commerce 
Commission  was  limited  in  its  scope  to  the  consideration  only 
of  specific  complaints.  It  could  not  on  its  own  initiative  pass 
upon  the  reasonableness  of  an  entire  new  schedule  of  rates  in 
advance  of  its  taking  effect.     It  must  take  the  matter  up,  if 

'  Economic  Review,  1911,  pp.  766-789,  reviews  this  whole  movement. 


EFFECTS  OF  LAW  OF   1906  535 

at  all,  bit  by  bit,  as  individual  shippers  chanced  to  complain, 
after  the  rates  have  become  operative.  This  abridgment  of 
its  power  to  pass  upon  the  reasonableness  of  tariffs  as  a  whole 
was  effected  in  the  Senate.  It  was  not  contemplated  either  by 
President  Roosevelt  or  by  the  House  of  Representatives.  The 
result,  as  predicted,  was  that  little  protection  was  afforded  to 
the  public  in  any  large  way.  Judging  by  results,  the  railroads 
were  as  free  as  they  ever  were,  to  increase  their  tariffs  when- 
ever they  saw  fit  so  to  do. 

The  imperative  need  of  amending  the  law,  and  of  granting 
power  to  suspend  such  rate  advances,  not  merely  in  particular 
cases  on  complaint,  but  as  to  entire  schedules  of  rates  prior  to 
their  taking  effect,  was  in  fact  met  by  the  next  set  of  amend- 
ments in  1910.  The  experience  of  the  intervening  years  amply 
proved  the  need  of  some  such  amendment. 

The  extent  of  the  changes  after  the  new  law  went  into  effect 
may  be  indicated  by  a  few  tj^pical  instances.  Few  commodi- 
ties are  of  greater  importance  to  the  United  States  than  chemical 
fertilizers,  used  in  enormous  quantities  all  over  the  country. 
The  basis  of  these  is  phosphate  rock.  The  freight  rate  on  this 
from  Tennessee  to  Chicago  in  1907  was  $3.40  per  ton.  It  was 
increased  to  $3.95,  until  the  Commission  ordered  its  reduction 
to  the  old  figure.^  At  the  same  time  the  Oregon  lumbermen 
had  their  rates  to  the  East  increased  about  one  quarter,  after 
a  period  of  quiescence  of  six  years.  From  the  Willamette 
valley  to  San  Francisco  —  a  test  case  soon  to  run  a  long  course 
before  the  courts  ^  —  lumber  rates  were  $3.10.  In  1907  thc-y 
were  put  up  to  five  dollars.  The  Commission  held  that  $3.40 
was  an  adequate  rate.  The  last  general  increase  had  occurred 
in  January,  1909,  particularly  in  transcontinental  rates,  where 
the  fruit  of  the  Harriman  monopoly  made  itself  felt.  Not 
unduly  great  in  the  East,  considering  the  increased  cost  of 
operation,  —  twenty-five  cents  per  ton  on  pig  iron  and  iron  pipe, 
for  instance,  —  the  Pacific  Coast  rates  from  New  York  rose 

1  15  I.C.C.  Rep..  79.  2  219  u.  S.,  433:  Cf.  p.  545,  infra. 


536  RAILROADS 

often  as  high  as  fifty  per  cent.  The  rate  on  dry  goods  went  up 
by  one-third.  Therein  lay  a  part  of  the  motive  power  for 
Union  Pacific  speculative  finance.^  Among  the  most  persis- 
tently contested  schedules  was  that  concerning  rates  from  the 
southwestern  cattle  ranges  to  the  markets  of  the  Middle  West.^ 
In  1897  the  rate  on  steers  was  twenty-seven  cents  per  hundred- 
weight. Step  by  step  it  went  up  to  the  level  of  thirty-six  and 
one-half  cents  in  1903,  —  a  rise  of  more  than  one- third  within 
six  years. 

Occasionally  one  strikes  an  exorbitant  rise  in  the  East,  how- 
ever, as  in  one  instance  where  on  imported  iron  pyrites  used 
in  making  sulphuric  acid,  the  rate,  which  in  1903  was  $1.56, 
became  $2.72  four  years  later.^  And  the  hardship  often  lay 
in  the  fact  that  these  increases  were  most  marked  in  the  case 
of  the  small  shipper,  —  the  very  one  who,  in  these  days  of  large 
enterprises,  we  can  least  afford  to  spare.  The  rate  on  cotton 
goods  from  the  South  to  the  Pacific  Coast  rose  only  fifteen  per 
cent,  between  1896  and  1907  by  the  carload;  for  smaller  lots 
it  rose  sixty-five  per  cent.*  In  1907,  38,000,000  pounds  of  cheese 
were  produced  in  southwestern  Wisconsin.  The  shipper  to 
Chicago  by  carload  paid  only  about  ten  per  cent,  more  in  1907 
than  eight  years  earlier;  but  the  shipper  in  smaller  lots  was 
compelled  to  pay  forty  per  cent,  more.^  As  always,  the  change 
was  along  the  line  of  least  resistance.  Such  a  policy  made  for 
larger  dividends ;  but  did  it  tend  to  the  perpetuation  of  equality 
of  opportunity  as  between  great  and  small  concerns?  That 
was  a  social  question  of  the  very  first  importance,  which  had 
much  to  do  with  the  demand  for  still  further  increase  of  the 
regulative  power  of  the  Federal  government  in  1910. 

Under  the  new  powers  conferred  by  law,  it  was  now  possible 
to   investigate   scientifically   many  matters  which   heretofore 

'  Much  data  is  in  U.  S.  v.  Union  Pacific,  etc.,  Supreme  Court,  No.  820, 
Oct.  term,  1911,  Appellants  Brief  of  Facts,  p.  558  et  seq. 

^  All  the  Cattle  Raisers  Association  of  Texas  cases,  especially  11  I.C.C. 
Rep.,  p.  296.     Cf.,  also,  pp.  70  and  167,  supra,  and  567,  infra. 

'  13  I.C.C.  Rep.,  357.       ^  12  I.C.C.  Rep.,  149.       ^  16  i.C.C.  Rep.,  85. 


EFFECTS  OF  LAW  OF  1906  537 

had  been  privately  governed  by  rule  of  thumb.  For  instance 
the  reasonableness  of  the  charges  for  refrigeration  in  the  move- 
ment of  citrus  fruit  is  dependent  in  practice  upon  the  methods 
employed  in  gathering  and  packing  them  for  market.^  Was  it 
better  business  practice  to  ship  oranges  and  lemons  in  ice- 
cooled  refrigerator  cars,  or  was  it  better  to  adopt  the  so-called 
pre-cooling  process,  combined  with  great  care  in  handling? 
The  former  was  the  long-standing  practice  of  the  fruit-growers, 
while  the  latter,  substantially  supported  by  the  investment  of 
more  than  a  million  dollars  in  plant,  was  advocated  by  the  car- 
riers. One  had  been  tested  in  practice,  the  other  was  yet  in 
the  experimental  stage.  But  aside  from  rivalry  of  method, 
were  not  the  shippers  entitled  to  pre-cool  or  refrigerate  their 
fruit  privately  if  they  so  desired?  The  determination  of  this 
question  meanc  an  elaborate  investigation  with  careful  records 
in  detail  as  to  the  results  obtained  in  either  case.  The  decision 
upheld  the  carriers  in  their  charges  for  the  older  methods  of 
treatment;  but  pre-cooling  charges  had  to  be  reduced  by 
seventy-five  per  cent.  It  appears,  therefore,  that  authority 
to  deal  with  one  of  the  most  serious  grievances  voiced  before 
the  Elkins  Committee  in  1905,  may  now  be  fairly  and 
scientifically  exercised  for  the  public  benefit. 

A  similar  technical  investigation  concerned  the  methods  of 
transporting  the  products  of  "creameries."  ^  Shall  dairy  prod- 
ucts be  centralized  at  favored  points,  possessed  of  a  sufficient 
supply  from  the  surrounding  territory  to  permit  of  large-scale 
manufacture;  or  shall  the  older  local  creamery  method  prevail, 
whereby  the  product  is  taken  directly  from  country  stations 
to  the  great  centres  of  consumption  like  Chicago?  The  par- 
ticular rate  adjustment  makes  all  the  difference  between  cream- 
eries scattered  throughout  the  countryside  or,  on  the  other 
hand,  located  in  the  great  cities.  One  of  the  prime  difficulties 
is  in  the  sparsity  and  uneven  distribution  of  the  cow  population. 
Here  was  an  order  requiring  a  very  careful  investigation  of  the 
1  20  I.C.C.  Rep.,  106.  2  15  I.C.C.  Rep.,  109. 


538  RAILROADS 

entire  business,  followed  by  a  nice  judgment  as  to  the  economic 
merits  of  the  case.  The  history  and  development  of  the  dairy 
business  in  the  West  had  to  be  thoroughly  looked  into.  Quite 
irrespective  of  the  resulting  order,  it  is  apparent  that  the  public 
is  certain  to  benefit  from  an  exhaustive  inquiry.  Yet  other 
general  investigations  of  the  same  sort  might  be  cited  to  the 
same  end.  The  wool  business  was  examined  thoroughly  in 
1911.^  The  entire  New  England  rate  system  as  well  as  the 
conditions  of  operation  were  overhauled  in  the  following  year, 
and  a  general  inquiry  into  the  hard  coal  situation  is  just  now 
under  way.  A  general  improvement  of  conditions  is  bound  to 
flow  from  the  free  exercise  of  such  general  powers. 

The  leading  Supreme  Court  decision  construing  the  Hep- 
burn law,  —  and,  constitutionally,  one  of  the  most  important 
in  recent  years,  —  was  rendered  in  1910  with  reference  to  the 
relation  between  the  exercise  of  power  over  transportation  by 
the  Interstate  Commerce  Commission  and  the  right  of  review 
of  such  action  by  the  courts.^  The  details  of  the  controversy 
are  indicative  of  the  nicety  of  economic  adjustment  required 
in  such  cases.  There  was  a  shortage  of  equipment  for  the 
carriage  of  soft  coal  on  the  lines  of  the  Illinois  Central  Railroad. 
This  commodity,  practically  speaking;  cannot  be  stored.  It 
must  be  disposed  of  at  once,  so  that  the  available  supply  of 
cars  determines  the  output  of  each  mine.  If,  in  this  case,  all 
the  cars  had  belonged  to  the  Illinois  Central  Railroad  to  be  used 
indiscriminately  by  the  mine  owners,  it  would  have  been  a 
simple  matter  to  have  allotted  the  equipment  among  all  the 
operators  along  its  lines  upon  the  basis  of  the  established  capac- 
ity of  each.  Unfortunately,  diversity  of  ownership  of  these 
cars  had  brought  about,  all  over  the  country,  special  rules  for 
effecting  the  allotments.     Some  cars  belonged  to  the  railroad; 

1  23  I.C.C.  Rep.,  151. 

2  215  U.  S.,  452;  also  Ibid.,  481.  The  original  order  of  the  Commission 
is  in  13  I.C.C.  Rep.,  451. 


JUDICIAL  INTERPRETATION  539 

others  to  the  mine  company,  to  other  private  parties,  or  to 
foreign  railways.  Certain  railroads  first  deducted  all  fuel 
carried  by  other  equipment  than  their  own  from  the  estimated 
capacity  of  each  mine,  and  then  divided  up  their  own  available 
cars  pro  rata  among  all  the  mines  according  to  the  net  capacity 
thus  fixed.  Others  allotted  their  cars  according  to  the  gross 
mine  capacity,  taking  no  account  of  the  private  or  outside 
equipment  which  any  particular  coal  mine  possessed  or  might 
obtain.  This  second  practice  evidently  favored  the  larger  con- 
cerns, supplied  with  abundant  capital  for  investment  in  cars  or 
for  renting  equipment.  For,  in  addition  to  their  own  cars, 
they  could  still  demand  as  many  more  from  the  railroad  on 
daily  allotment  as  if  they  were  entirely  dependent  upon  it  for 
the  movement  of  all  their  coal.  Which  was  the  fairer  practice? 
A  nice  economic  question  was  thus  raised.  Has  a  shipper  the 
right  to  exclusive  use  of  all  his  own  fuel  cars,  and,  in  addition 
thereto,  a  full  share  of  the  system  cars  of  the  railroad?  Dis- 
putes of  this  sort  have  been  before  the  Commission  and  the 
courts  for  years. 

In  this  Illinois  Central  case,  a  colliery  company  complained 
of  even  a  more  minute  detail  of  the  rule  employed  by  the  rail- 
road in  making  its  daily  allotment,  affirming  it  to  be  discrimina- 
tory in  effect.  There  was  a  shortage  of  cars  and  of  coal.  The 
railroad  was  employing  many  of  its  own  cars  in  the  special 
service  of  carrying  fuel  for  its  own  use.  The  particular  griev- 
ance was  its  insistence  upon  treating  these  special  Illinois 
Central  cars,  for  the  purposes  of  allotment,  as  if  they  were 
merely  ordinary  private  cars;  that  is  to  say,  by  supplying  them 
in  practice  regardless  of  and  outside  of  the  daily  allotment, 
otherwise  agreed  upon.  It  thus  appears  that  the  economic 
issue  was  highly  technical  in  character.  Similar  complaints 
had  been  already  variously  decided  by  other  tribunals.  The 
Commission,  moreover,  was  bound  to  consider  this  complaint 
with  several  others  of  a  like  sort.  Exercising  its  best  business 
judgment  under  all  the  circumstances,  it  decided  against  the 


540  RAILROADS 

practice,  ordering  the  Illinois  Central,  under  the  powers  con- 
ferred by  the  new  law  of  1906,  to  include  all  cars,  however 
owned  or  for  whatever  purpose  used,  in  figuring  its  daily  allot- 
ments in  time  of  shortage  of  equipment.  The  case  went  to  the 
Supreme  Court  upon  petition  of  the  railroad  to  set  aside  the 
order  of  the  Commission. 

By  contrast  with  the  economic  intricacy  of  this  case,  the 
fundamental  legal  question  was  simple.  How  broad  was  the 
right  of  review  of  the  Commission's  order,  as  conferred  by 
the  amendments  adopted  in  1906?  Were  the  courts  to  rest 
content  merely  to  pass  upon  the  regularity  and  lawfulness  of 
the  forms  of  procedure  adopted  by  the  Commission,  or  might 
they  go  further,  and,  hearing  all  the  evidence  as  to  fact,  pro- 
ceed to  settle  the  economic  controversy  as  well  as  the  law 
points,  in  entire  independence  of  the  Commission?  In  the 
former  case  administrative  control  would  result.  In  the  latter, 
regulative  power  would  really  reside  in  the  judicial  branch  of 
the  government.  It  was  the  same  old  controversy  which  by 
adoption  of  the  second  alternative  had  practically  emasculated 
the  law  of  1887,  and  had  necessitated  its  amplification  by 
amendment  in  1906.^  A  momentous  issue  was  presented.  To 
go  forward  would  make  for  logical  definition  and  separation  of 
the  powers  of  the  Federal  government;  to  retreat  would  be  to 
precipitate  anew  the  inevitable  conflict  in  Congress,  from 
which,  it  was  hoped,  we  had  emerged  for  good! 

The  importance  of  the  Illinois  Central  decision  is  such  that 
the  conclusion  should  be  stated  by  direct  quotation,  with  our 
italics  as  to  the  main  point. 

"Beyond  controversy,  in  determining  whether  an  order  of  the 
Commission  shall  be  suspended  or  set  aside,  we  must  consider,  a,  all 
relevant  questions  of  constitutional  power  or  right;  h,  all  pertinent 
questions  as  to  whether  the  administrative  order  is  within  the  scope  of 
the  delegated  authority  under  which  it  purports  to  have  been  made; 
and,  c,  a  proposition  which  we  state  independently,  although  in  its 
essence  it  may  be  contained  in  the  previous  one,  viz.,  whether,  even 

1  P.  502,  supra. 


JUDICIAL  INTERPRETATION  541 

although  the  order  be  in  form  witliin  the  delegated  power,  nevertheless 
it  must  be  treated  as  not  embraced  therein,  because  the  exertion  of 
authority  wliicli  is  questioned  has  been  manifested  in  such  an  unreason- 
able manner  as  to  cause  it,  in  truth,  to  be  within  the  elementary  rule 
that  the  substance,  and  not  the  shadow,  determines  the  vahditj''  of  the 
exercise  of  the  power.  Postal  Telegraph  Cable  Co.  v.  Adams,  155  U.  S., 
688,  698.  Plain  as  it  is  that  the  powers  just  stated  are  of  the  essence 
of  judicial  authority,  and  wliich,  therefore,  may  not  be  curtailed,  and 
whose  discharge  may  not  be  by  us  in  a  proper  case  avoided,^  it  is  equally 
'plain  that  such  perennial  powers  lend  no  support  ivhatever  to  the  proposi- 
tion that  we  may,  under  the  guise  of  exerting  judicial  poicer,  usurp  merely 
administrative  functions  by  setting  aside  a  lauful  administrative  order 
upon  our  conception  as  to  whether  the  administrative  power  has  been  wisely 
exercised.  Power  to  make  the  order  and  not  the  mere  expediency  or  wisdom 
of  having  made  it,  is  the  question." 

On  this  cogent  reasoning  the  Supreme  Court,  therefore, 
quite  independently  of  its  opinion  upon  the  economic  merits, 
declined  to  permit  interference  with  the  order  of  the 
Commission. 

Immediately  following  the  Illinois  Central  decision  another 
was  rendered  concerning  somewhat  the  same  economic  issue, 
namely  methods  of  supplying  coal  cars  on  the  Baltimore  and 
Ohio.-  The  following  quotation  is  significant  of  what  promises 
to  be  the  line  of  reasoning  in  future. 

"In  .  .  .  the  .  .  .  case  just  decided,  it  was  pointed  out  that  the  effect 
of  the  section  was  to  cause  it  to  come  to  pass  that  courts,  in  determining 
whether  an  order  of  the  Commission  should  be  suspended  or  enjoined, 
were  without  power  to  invade  the  administrative  functions  vested  in 
the  Commission,  and,  therefore,  could  not  set  aside  an  order  duly 
made  on  a  mere  exercise  of  judgment  as  to  its  wisdom  or  expediency. 
Under  these  circumstances  it  is  apparent,  as  we  have  said,  that  these 
amendments  of  1906  add  to  the  cogency  of  the  reasoning  which  led 
to  the  conclusion  in  the  Abilene  Case,  that  the  primary  interference 
of  the  courts  -s^-ith  the  administrative  functions  of  the  Commission  was 
wholly  incompatible  with  the  act  to  regulate  commerce.  This  result 
is  easily  illustrated.  A  particular  regulation  of  a  carrier  engaged  in 
interstate  commerce  is  assailed  in  the  courts  as  unjustly  preferential 
and  discriminatoiy.  Upon  the  facts  found,  the  complaint  is  declared 
to  be  well  founded.     The  administrative  powers  of  the  Commission 

1  Italics  are  ours.  2  215  U.  S.,  481. 


542  RAILROADS 

are  invoked  concerning  a  regulation  of  like  character  upon  a  similar 
complaint.  The  Commission  finds,  from  the  evidence  before  it,  that 
the  regulation  is  not  unjustly  discriminatory.  Which  would  prevail? 
If  both,  then  discrimination  and  preference  would  result  from  the  very 
prevalence  of  the  two  methods  of  procedure.  If,  on  the  contrary,  the 
Commission  was  bound  to  follow  the  previous  action  of  the  courts, 
then  it  is  apparent  that  its  power  to  perform  its  administrative  func- 
tions would  be  curtailed,  if  not  destroyed.  On  the  other  hand,  if  the 
action  of  the  Commission  were  to  prevail,  then  the  function  exercised 
by  the  court  would  not  have  been  judicial  in  character,  since  its  final 
conclusion  would  be  suceptible  of  being  set  aside  by  the  action  of  a 
mere  administrative  body.  That  these  illustrations  are  not  imaginary 
is  established  not  only  by  this  record,  but  by  the  record  in  the  case 
of  the  Illinois  C.  R.  Co.  v.  Interstate  Commerce  Commission." 

These  opinions,  expressly  recognizing  the  constitutionality 
of  the  free  and  full  exercise  of  legislative  power  delegated  by 
Congress  beyond  the  power  of  the  courts  to  review,  are  of  funda- 
mental importance.  Had  they  been  rendered  a  few  days  earlier, 
as  we  shall  see,  they  might  have  prevented  the  supposed  neces- 
sity of  setting  up  a  new  commerce  court  by  law  in  1910.  They 
would  certainly  have  abridged  the  Congressional  debates  over 
points  of  law.  Under  these  decisions,  only  authority  and  con- 
stitutional rights  may  be  reviewed.  The  same  issues  were 
raised  in  the  Portland  Gateway  opinion  in  1910,  soon  to  engage 
our  attention,  concerning  the  Commission's  right  to  designate 
through  routes  for  passenger  travel.  Over-ruling  the  Commis- 
sion in  this  instance,  however,  the  narrow  right  of  review  by 
the  courts,  as  laid  down  in  the  Illinois  Central  case,  is  some- 
what widened  by  an  apparent  refusal  to  treat  the  Commission's 
findings  as  to  fact  as  conclusive  in  determining  its  jurisdiction; 
however  conclusive  it  may  regard  them  in  other  respects.  A 
shady  bj^vay  of  judicial  encroachment  is  thus  rather  surrep- 
titiously indicated. 

A  more  satisfactory  re-affirmation  of  the  disposition  of  the 
Supreme  Court  to  allow  a  wide  field  and  a  free  hand  to  the 
Commission  in  the  exercise  of  its  offices,  is  to  be  found  in  a 
third  opinion,  the  so-called  Burnham,  Hanna,  Hunger  case,  also 


JUDICIAL  INTERPRETATION  543 

rendered  in  1910.^  Certain  Missouri  river  cities  complained 
that  rates  from  the  Atlantic  seaboard  were  unduly  high  by  com- 
parison with  those  to  cities  in  Central  Traffic  territory,  namely 
betAveen  the  Mississippi  river  and  Buffalo.  The  Commission 
held  the  complaint  well  founded;  and  ordered  a  readjustment, 
by  reduction  of  that  portion  of  the  rate  west  of  the  Mississippi. 
Thus,  by  leaving  the  rates  to  the  Central  Traffic  Association 
cities  unchanged,  it  materially  benefited  those  along  the  Missouri 
river  by  comparison.  Omaha  and  Kansas  City  were  brought 
substantially  closer  to  the  seaboard  as  compared  with  Chicago 
and  similar  trade  centres.  The  western  roads,  alone  affected 
by  this  order,  attacked  it  in  the  courts  as  an  assertion  by  the 
Commission  of  power  "artificially  to  apportion  out  the  country 
into  zones  tributary  to  given  trade  centres  to  be  pre-determined 
by  the  Commission,  and  non-tributary  to  others."  The  Supreme 
Court,  in  upholding  the  order,  held  that  it  would  indeed  be  an 
abuse  of  power  to  raise  or  lower  rates  for  the  sole  purpose  above- 
outlined.  Nevertheless,  if  the  Commission  were  seeking  prima- 
rily to  correct  rates  inherently  unreasonable,  such  action  would 
not  be  invalidated  by  incidental  effects  upon  trade  conditions. 
The  Supreme  Court  found,  therefore,  that  the  order  in  ques- 
tion was  within  its  power,  as  thus  defined,  and,  governed  by  the 
reasoning  in  the  Illinois  Central  case,  held  that  the  Commis- 
sion's decision  could  not  be  judicially  reviewed  upon  the  merits. 
The  line  of  judicial  interpretation  preceding  the  Mann- 
Elkins  law  of  1910  has  been  even  more  rigidly  followed  by  the 
Supreme  Court  since  that  time.  The  most  important  decision, 
perhaps,  was  rendered  in  1912.  This  concerned  the  absolute 
reasonableness  of  rates  on  fir  lumber  from  the  northern  Pacific 
forests  to  the  Middle  West.^  But  it  involved  the  additional 
consideration  that  the  transcontinental  roads  had  in  a  measure 

1218  U.  S.,  88;  14  I.C.C.  Rep.,  299.  Also,  IG  Idem,  56;  21  Idem, 
546;  and  23  Idejn,  195.  Ann.  Rep.  I.C.C,  1909,  p.  33,  discusses  it 
fully. 

2  32  Supreme  Court  Rep.,  109.  Economic  details  in  chap.  V,  p.  150, 
supra. 


544  RAILROADS 

guaranteed  an  economic  status  to  lumbermen  under  which  they 
had  made  large  investments,  which,  as  they  claimed,  were 
jeopardized  by  an  increase  of  freight  rates  in  1907.  Two  points 
were  raised.  One  concerned  the  reasonableness  of  the  new 
rates  per  se;  the  other  their  reasonableness  in  the  hght  of  their 
effects  upon  an  established  yet  dependent  industry.  It  was  the 
old  issue,  in  brief,  between  cost  of  service  and  value  of  service. 
A  decision  upon  the  latter  basis  alone  might  have  resulted,  as 
in  a  similar  action,  in  the  Burnham,  Hanna,  Munger  case,  just 
outlined,  in  decreeing  an  extension  of  authority  over  commerce 
by  the  Commission.  Fortunately  the  court  found  otherwise 
in  these  lumber  cases.  It  was  able  to  uphold  the  order  of  the 
Commission,  without  deviation  from  the  path  of  reasoning 
laid  down  in  the  Illinois  Central  opinion.  The  decision 
concludes  as  follows: 

"Considering  the  case  as  a  whole,  we  cannot  say  that  the  order  was 
made  because  of  the  effect  of  the  advance  on  the  lumber  industry,  nor 
because  of  a  mistake  of  law  as  to  presumptions  arising  from  the  long 
continuance  of  the  low  rate  when  the  carrier  was  earning  dividends,  nor 
that  there  was  no  evidence  to  support  the  finding.  If  so,  the  Com- 
mission acted  within  its  power,  and,  in  view  of  the  statute,  its  lawful 
orders  camiot  be  enjoined." 

The  unsatisfactory  element  in  this  decision  is  its  implication 
that  the  Commission  must  be  governed  by  cost  of  service  prin- 
ciples in  fixing  reasonable  rates.  For  to  admit  the  plea  of  the 
lumbermen,  that  their  industry  could  not  stand  the  increase, 
would  obviously  lend  an  ear  to  the  principle  of  value  of  service. 
May  the  railroads  properly  adopt  either  of  the  two  principles 
in  fixing  their  tariffs,  while  the  Commission  is  confined  to  cost 
of  service  alone?  Any  such  conclusion  would  tend  to  paralyze 
regulation.  And  Congress  would  certainly  in  a  moment  fly 
to  the  rescue  with  amphfication  of  the  statute. 

This  Pacific  coast  lumber  opinion  also  contains  the  following 
succinct  statement  of  the  grounds  upon  which  alone  the  Federal 
courts  may  review  the  orders  of  the  Commission: 


JUDICIAL  INTERPRETATION  545 

"There  has  been  no  attempt  to  make  an  exhaustive  statement  of 
the  principle  involved,  but  in  cases  thus  far  decided,  it  has  been  settled 
that  the  orders  of  the  Commission  are  final  unless  (1)  beyond  the  power 
wliich  it  could  constitutionally  exercise;  or  (2)  beyond  its  statutory 
power;  or  (3)  based  upon  a  mistake  of  law.  But  questions  of  fact 
may  be  involved  in  the  determination  of  questions  of  law,  so  that  an 
order,  regtdar  on  its  face,  may  be  set  aside  if  it  appears  that  (4)  the 
rate  is  so  low  as  to  be  confiscatory  and  in  violation  of  the  constitutional 
prohibition  against  taking  property  without  due  process  of  law;  or 
(5)  if  the  Commission  acted  so  arbitrarily  and  unjustly  as  to  fix  rates 
contrarj'  to  e\'idence,  or  without  evidence  to  support  it;  or  (6)  if  the 
authority  therein  involved  has  been  exercised  in  such  an  unreasonable 
manner  as  to  cause  it  to  be  within  the  elementary'  rule  that  the  sub- 
stance, and  not  the  shadow,  determines  the  vahdity  of  the  exercise 
of  the  power." 

Quite  like  the  preceding  case  was  another  concerning  the 
reasonableness  of  advances  of  rates  upon  fir  lumber  from  the 
Willamette  valley  to  San  Francisco.  The  Commission  had 
ordered  a  reduced  rate,  from  which  the  Southern  Pacific  appealed 
to  the  Supreme  Court.^  This  tribunal  set  aside  the  order  on 
the  ground  that,  while  seeking  to  protect  an  investment  in 
lumber  mills,  it  had  not  been  governed  by  considerations  as  to 
the  intrinsic  reasonableness  of  the  rates.  The  lumbermen  then 
went  back  to  the  Commission  with  a  new  complaint,  in  response 
to  which  a  slight  advance  was  permitted  to  the  railroad,  ap- 
parently as  a  token  of  compliance  with  the  opinion  of  the 
Supreme  Court.  But  the  Southern  Pacific,  not  yet  content, 
promptly  appealed  a  second  time  under  the  Mann-Elkins  law 
to  the  new  Commerce  Court.  On  June  4,  1912,  this  tribunal 
fully  sustained  the  Commission  in  a  most  suggestive  declaration 
of  the  obligation  of  a  carrier,  having  once  induced  capital  to 
embark  in  a  new  enterprise  under  promise  of  low  rates,  being 
subsequently  estopped  from  charging  to  the  full  limit  of  what 
the  traffic  will  bear.^  This  is  a  gratifying  evidence  of  acqui- 
escence of  this  new  tribunal  in  the  main  line  of  interpretation 
laid  down  by  the  Supreme  Court. 

1  219  U.  S.,  433;  14  I.C.C.  Rep.,  61.  Economic  details  at  p.  150, 
supra.  ^  U.  S.  Commerce  Court,  No.  59,  April  session,  1912. 

VOL.  I — 35 


546  RAILROADS 

Federal  decisions  construing  the  law  of  1906  during  this 
period  under  review,  revealed  various  shortcomings  and  defects 
which  could  be  repaired  only  by  additional  legislation.  They 
are  to  be  considered  among  the  causes  contributing  to  the 
passage  of  the  Mann-Elkins  Act  of  1910,  shortly  to  engage  our 
attention.  Two  in  particular,  the  Orange  Routing  case  and  the 
Portland  Gateway  order,  merit  discussion.  Neither  directly 
involved  monetary  considerations,  but  a  conflict  between  the 
rights  of  shippers  and  carriers.  And  both  alike  went  on  appeal 
to  the  Supreme  Court  of  the  United  States. 

The  Orange  Routing  case  against  the  Southern  Pacific 
Railroad  touched  the  right  of  the  shipper  to  name  the  particular 
railways  over  which  his  fruit  should  reach  Eastern  markets.^ 
Rates  were  the  same  by  whatever  route;  but  the  railways 
denied  the  right  of  the  shipper  not  only  to  name,  but  even  to 
know,  the  route  taken  by  his  goods  in  transit.  The  same  issue 
came  up  some  years  ago,  concerning  the  right  of  cotton  shippers 
at  Memphis  to  designate  the  particular  connecting  railroads 
which  should  haul  their  goods.  The  purpose  of  the  carriers  in 
seeking  to  control  this  matter  is  obvious,  and  may  be  praise- 
worthy. Secret  rebates  cannot  often  be  secured  by  shippers 
from  the  initial  carriers,  especially  if,  as  in  California,  no  railway 
competition  exists.  For  the  Atchison  and  the  Southern  Pacific 
have  done  away  with  that  by  pooling  their  fruit  business. 
Secret  rebates,  if  secured  by  shippers  at  all,  must  be  wrung  from 
the  connecting  lines,  which  bid  for  it  at  the  great  junction  points, 
like  Kansas  City  and  Chicago.  The  initial  road,  by  reserving 
the  right  to  route  the  freight,  is  able  most  effectively  to  nullify 
all  such  pernicious  contracts.  But,  on  the  other  hand,  this 
practice  denies  to  the  owner  of  the  goods,  control,  or  even  super- 
vision, over  his  own.  Market  conditions  may  easily  change 
while  the  goods  are  in  transit.  It  may  be  desirable  to  stop  them 
off  at  Chicago,  or  divert  them  to  New  Orleans.  And,  moreover, 
damages  for  delay  on  such  perishable  goods  as  fruit  are  refused 

1  200  U.  S.,  536. 


JUDICIAL  INTERPRETATION  547 

by  the  terms  of  the  contract.  The  routing  road  exercises  power 
without  assuming  responsibihty.  On  these  grounds,  and  in 
consonance  with  the  long-estabhshed  principles  of  common 
law,  the  Interstate  Commerce  Commission  held  that  the  ship- 
pers' rights  were  jeopardized.  It  was  shoiivTi  that  freight  was 
often  diverted  from  one  road  to  another  in  order  to  secure  more 
valuable  percentages  of  the  through  rate  for  the  initial  carrier. 
The  Circuit  Court  in  September,  1904,  provisionally  sustained 
the  Commission;  but  its  opinion  was  reversed  by  the  Supreme 
Court  in  1906.  The  court  of  last  resort  failed  to  find  in  the 
law  any  prohibition  of  such  regulations  concerning  routes  by 
the  railroads.  Incidentally  it  held  that  the  Federal  courts 
might  enforce  orders  of  the  Commission,  even  although  for 
reasons  differing  from  those  which  governed  the  original  order.^ 

The  Portland  Gateway  case  in  1910,  before  the  Supreme 
Court,^  also  disclosed  a  defect  in  the  law  of  1906.  It  dealt  with 
the  right  of  the  Commission  to  designate  through  passenger 
routes.  Seattle,  Washington,  may  be  reached  from  the  Middle 
West  either  by  various  lines  to  St.  Paul  and  from  thence  due 
west  by  the  "Hill  lines,"  or  by  various  railroads  to  Kansas  City 
and  thence  by  the  Burlington  and  the  Northern  Pacific,  also 
"  Hill  lines."  There  are  also  many  routes  first  proceeding  west- 
ward via  the  Union  Pacific  to  Portland,  Oregon,  and  from  thence 
up  to  Seattle.  By  these  latter  routes  most  of  the  journey  would 
be  over  the  "Harriman  lines,"  whereas  by  the  former  it  would 
be  by  way  of  their  competitors  for  the  control  of  the  northwest. 
Passengers  all  the  way  over  the  "Hill  lines"  were  afforded  every 
facility  for  through  travel  in  the  way  of  tickets  and  baggage; 
but  if  they  chose  the  Portland  route,  great  inconvenience  followed 
from  the  refusal  of  the  Hill  lines  to  cooperate  in  facilities  at  the 
transfer  point.  In  brief  the  "Hill  lines"  were  working  for  the 
long  haul  over  their  own  rails,  as  against  the  merely  local  haul 
from  Portland  to  Seattle,  which  would  follow  the  choice  of  the 
Harriman  route. 

1  The  resulting  change  in  the  law  at  p.  572,  infra.         ^  216  U.  S.,  538. 


548  RAILROADS 

The  Commission  upon  its  own  motion  investigated  this 
situation,  and,  as  a  result,  ordered  the  Northern  Pacific  to  join 
with  its  rivals  in  establishing  through  routes  via  Portland  to 
Seattle.  This  was  done  under  authority  in  the  law  of  1906  to 
establish  through  routes  and  joint  rates,  provided  "no  reason- 
able or  satisfactory  through  route  exists."  The  Northern 
Pacific  claimed,  and  was  upheld  therein  by  a  dissenting  opinion 
from  the  Commission,  that  there  was  already  in  existence  such 
a  route.  Quick  and  comfortable  travel  via  St.  Paul  already 
existed.  Some  eight  thousand  persons  annually  for  one  reason 
or  another  preferred,  nevertheless,  to  go  through  Portland. 
The  Commission  held  that  this  preference  was  reasonable,  and 
that  accordingly,  with  respect  to  such  travellers,  there  was  in- 
deed no  reasonable  through  route  in  effect.  Passenger  traffic, 
involving  the  element  of  personal  choice,  in  other  words,  was 
different  in  law  from  freight  business.  The  Circuit  Court  set 
aside  this  order  upon  the  ground  that  a  satisfactory  alternative 
route  over  the  Northern  Pacific  did  actually  exist.  This  decree 
was  affirmed  by  the  Supreme  Court  of  the  United  States  in 
1910.  But  it  was  a  hard-won  victory  for  the  carriers,  inasmuch 
as  Congress  within  six  months  specifically  authorized  the  Com- 
mission to  regulate  such  matters  in  future,  without  limitation 
as  to  the  existence  of  other  satisfactory  routes. 

The  bitter  rivalry  between  the  Hill  and  Harriman  systems 
for  the  control  of  the  Northwest,  as  affecting  the  routing  of 
freight  traffic  as  well  as  of  jDassengers  through  Portland,  resulted 
in  carrying  a  second  case  of  the  same  sort  before  the  Supreme 
Court.  May  temporary  delay  and  congestion  of  business  by 
way  of  any  given  line  afford  the  Commission  authority  to  desig- 
nate another  through  route!  In  this  instance,  the  Supreme 
Court  has  affirmed  the  order  of  the  Commission.^  It  would 
appear,  therefore,  that  this  issue,  for  the  present  at  least,  is 
closed.      The   regulative  power  of   the   Federal  government 

^  Rendered  January,  1912.  The  Commission's  order  is  in  14  I.C.C. 
Rep.,  51. 


JUDICIAL  INTERPRETATION  549 

over  routes  and  the  division  of  joint  rates  is  satisfactorily 
upheld. 

Several  Supreme  Court  decisions  defining  the  power  of  the 
Commission  to  require  testimony,  both  oral  and  documentary, 
in  relation  to  matters  which  came  before  it,  were  rendered  about 
this  time.  Its  prestige  and  authority  in  this  regard,  —  already 
affirmed  in  the  late  nineties,^ — were  considerably  enhanced  by 
an  opinion  delivered  in  April,  1904.-  In  the  course  of  the  pro- 
ceedings, upon  complaint  of  William  R.  Hearst  against  the 
Reading  and  other  coal  roads,  certain  contracts  between  the 
Lehigh  Valley  Coal  Company  and  independent  operators  were 
called  for.  One  Baird  and  others,  including  President  Baer 
of  the  Reading  company,  declined  to  produce  these  coal  pur- 
chase contracts.  Others  refused  to  testify  concerning  methods 
of  fixing  the  price  for  anthracite  coal  at  tidewater.  Disregard- 
ing certain  purely  legal  details,  these  refusals  were  based  upon 
the  contention  that  neither  the  Commission  nor  Hearst,  —  a 
well-kno^\Ti  owner  of  various  newspapers,  —  had  shoT\-n  any 
legal  interest  in  the  complaint.  The  court  held,  however,  that 
the  want  of  direct  damage  to  the  complainant  was  not  essential 
to  his  standing  before  the  Commission.  Moreover,  in  this  case, 
the  Supreme  Court  overruled  the  Federal  Circuit  Court,  which 
had  held  that  the  details  of  the  contracts  for  purchase  of  coal 
by  railroads  from  independent  operators  related  wholly  to  intra- 
state transactions,  —  that,  in  other  words,  the  selling  of  coal  in 
Pennsylvania  had  nothing  to  do  with  interstate  commerce. 
The  Supreme  Court  adjudged  that  all  the  details  of  these  trans- 
actions had  a  bearing  upon  the  general  question  of  the  degree 
of  monopoly  in  the  coal  business,  and  could  not  properly  be 
withheld  from  examination  as  evidence  by  the  Commission.  In 
conclusion  the  court  said:  "To  unreasonably  hamper  the  Com- 
mission by  narrowing  its  field  of  inquiry  beyond  the  require- 
ments of  the  due  protection  of  rights  of  citizens,  will  be  to 
1  Pp.  457-460,  supra.  =>  194  U.  S.,  25. 


550  RAILROADS 

seriously  impair  its  usefulness  and  prevent  a  realization  of  the 
salutary  purposes  for  which  it  was  established  by  Congress." 
This  sweeping  decision  by  the  court  of  last  resort  well  buttressed 
the  former  decisions  of  that  tribunal  in  the  Brimson  and  Brown 
cases. 

The  so-called  "Immunity  Bath"  Federal  Court  decision  in 
1906  materially  affected,  not  so  much  the  scope  of  authority  of 
the  Commission  as  its  mode  of  procedure  in  eliciting  testimony 
in  railroad  cases.^  A  resolution  of  the  House  of  Representatives 
in  1904  had  directed  the  Commissioner  of  Corporations  to 
conduct  an  investigation  into  the  affairs  of  the  so-called  "Beef 
Trust."  In  the  course  of  this  inquiry,  Federal  officials  from  the 
bureau  held  interviews  in  Chicago  with  prominent  members  of 
the  beef-packing  establishments.  Important  evidence  v/as 
obtained,  with  the  understanding  that  this  was  merely  a  general 
investigation  having  no  relation  to  the  Department  of  Justice, 
nor  intended  to  be  used  in  the  prosecution  of  any  suits  at  law. 
At  the  same  time,  agents  examined  the  books  of  these  com- 
panies. The  accountants,  however,  in  all  cases  refused  to  certify 
to  their  accuracy  under  oath.  The  material  thus  secured  was 
incorporated  in  a  report  of  the  bureau  in  the  following  year. 
Not  long  afterward,  when  the  prosecution  of  this  combination 
was  undertaken  by  the  Department  of  Justice,  the  attornej-s  for 
the  government  made  use  of  data  in  this  report  of  the  Bureau 
of  Corporations  in  presenting  their  case.  Consequently,  on 
behalf  of  the  packers  under  indictment  under  the  provisions  of 
the  Sherman  Anti-Trust  Act,  it  was  urged  that  the  interdictions 
of  this  law  were  inoperative  as  to  them,  inasmuch  as  they  had 
virtually  been  made  to  testify  against  themselves.  The  Dis- 
trict court  affirmed  this  immunity  from  prosecution  under  the 
provision  of  the  Constitution  forbidding  any  person  from  being 
compelled  in  a  criminal  case  to  be  a  witness  against  himself. ^ 

1  142  Fed.  Rep.,  808. 

2  This  immunity  was  expressly  limited  to  natural  persons.  Corpora- 
tions had  been  made  directly  liable  by  the  Act  of  1903.  This  point  was 
brought  out  in  the  Heukel  and  Nelson  cases;  201  U.  S.,  43,  90,  147. 


JUDICIAL  INTERPRETATION  551 

The  direct  bearing  of  this  decision  upon  subsequent  prosecu- 
tions for  rebating,  as  in  the  notable  Chicago  and  Alton  case 
in  the  following  year,  is  apparent.  No  general  investigation 
of  any  subject,  evidently,  could  be  undertaken  either  by  Con- 
gress or  the  Interstate  Commerce  Commission,  in  the  course 
of  which  testimony  had  been  elicited  under  pressure,  if  it  was 
intended  that  criminal  prosecution  by  the  Department  of 
Justice  was  subsequently  to  take  place.  The  eagerness  of 
witnesses  to  secure  the  privileges  of  the  "Immunity  Bath" 
by  frank  avowal  of  material  facts  might  otherwise  thwart 
the  government  in  the  pursuance  of  its  ends. 

Another  important  decision  of  the  Supreme  Court  touching 
the  right  of  the  Commission  to  compel  testimony  was  rendered 
in  1908  in  connection  with  the  investigation  of  the  Union  Pacific 
system.^  Mr.  Harriman,  the  dominant  factor  in  the  manage- 
ment of  this  system,  had  caused  the  Union  Pacific  to  purchase 
certain  stocks  of  the  Atchison  and  a  number  of  other  railroads 
in  different  parts  of  the  country.  The  purchase  price  being 
known,  the  witness  was  asked  whether  he  had  a  personal  interest 
in  the  securities  thus  acquired  by  the  road  under  his  control. 
He  declined  to  answer,  on  the  ground  that  the  power  to  require 
testimony  w^as  limited  to  the  only  cases  where  the  sacrifice  of 
privacy  was  necessary,  namely  those  where  the  investigation 
concerned  a  specific  breach  of  the  law.  The  court,  with  three 
justices  dissenting,  sustained  Harriman  in  his  refusal,  on  the 
ground  that  this  particular  investigation  was  undertaken,  not 
in  pursuance  of  a  complaint  of  specific  violation  of  the  law,  but 
merely  for  the  sake  of  general  information  as  to  the  maimer  and 
method  in  which  the  business  of  common  carriers  was  being 
conducted.  No  question  was  raised  as  to  the  right  of  the  Com- 
mission to  undertake  general  investigations  of  this  sort;  it  was 
merely  held  that  in  the  course  of  such  investigations  there  was 
a  limit  to  the  inquisitorial  power  of  this  administrative  body. 

'  211  U.  S.,  407.  This  decision  is  critically  examined  with  reference  to 
the  policy  of  the  Commission  in  its  Annual  Report,  1908,  p.  17. 


552  RAILROADS 

It  may  be  added  in  this  connection  that  the  amendments  added 
by  the  Mann-Elkins  Act  of  1910  most  specifically  defined  the 
authority  of  the  Commission  in  this  regard. 

The  "commodity  clause"  of  the  Hepburn  amendments  to 
the  Interstate  Commerce  Law,  because  of  its  unfortunate 
ambiguity,  has  already  twice  been  before  the  Supreme  Court. ^ 
The  first  interpretation  was  given  in  a  decision  concerning  the 
Delaware  and  Hudson  Railroad,  handed  down  in  May,  1909.^ 
This  affirmed  the  constitutionality  of  the  statute  at  all  points; 
but,  at  the  same  time,  emasculated  it  most  effectually.  For, 
in  order  to  harmonize  the  opinion  with  prior  ones  holding  that 
ownership  of  stock  in  a  corporation  did  not  constitute  legal 
ownership  of  the  property  of  the  company,  it  was  necessarily 
held  that  a  railroad  by  owning  the  share  capital  of  a  coal  com- 
pany chd  not  thereby  possess  an  interest,  direct  or  mdirect,  in 
the  coal  mined.  Moreover,  a  railroad  which  was  the  legal  owner 
of  coal  at  the  mine  might  escape  the  interdiction  of  the  law  by 
selling  the  coal  before  transportation  began.  A  handy  means 
of  evading  the  intent  of  the  law  could  not  have  been  more 
plainly  indicated. 

An  attempt  specifically  to  prohibit  stock  ownership  in  coal 
mines  by  railroads,  —  thus  meeting  in  part  the  situation  arising 
out  of  the  foregoing  decision,  —  was  made  in  connection  with 
the  Mann-Elkins  Act  in  1910;  but  to  no  avail.  The  Senate, 
by  a  vote  of  twenty-five  to  thirty-one,  rejected  an  amendment 
proposed  by  Senator  Bailey  of  Texas,  to  prohibit  stock  owner- 
ship so  clearly  'Hhat  not  even  a  judge  of  the  Supreme  Court 
could  fail  to  understand  it."  The  negative  votes  were  all  cast 
by  the  so-called  "regular"  Republicans.  In  the  meantime,  the 
clause  had  been  carried  to  the  Supreme  Court  for  further  inter- 
pretation in  a  suit  against  the  Lehigh  Valley  Railroad.^    The 

1  Congressional  History  at  p.  513,  supra.  The  coal  combination  will 
be  fully  described  in  vol.  II. 

2  United  States  v.  Delaware  and  Hudson  Railroad,  etc.;  213  U.  S.,  257. 
»  220  U.  S.,  257;  decided  April,  1911. 


JUDICIAL  INTERPRETATION  553 

government  in  the  lower  court  had  already  been  defeated  in  an 
attempt  to  raise  questions  of  fact  as  to  the  pecuniary  interest 
of  the  road  in  the  coal  transported,  irrespective  of  the  technicali- 
ties as  to  legal  ownership.  The  outcome  in  this  case  was  more 
satisfactory.  The  Circuit  Court  was  held  to  have  erred  in 
ruling  out  these  considerations.  It  was  unanimously  decided 
by  the  Supreme  Court  that  it  was  in  violation  of  the  law  to  use 
stock  ownership  for  the  purpose  of  destroj^ng  the  entity  of  a 
producing  corporation,  while  still  so  "commingling"  its  affairs 
in  administration  with  the  affairs  of  the  railroad  as  to  make  the 
two  corporations  virtually  one.  This  was  a  distinct  gain  for 
the  government.  It  necessitated  a  compliance  with  the  law  in 
good  faith.  Upon  the  basis  of  this  decision  the  Department  of 
Justice  instituted  a  new  action  against  the  Lehigh  Valley  Road, 
which  was  promptly  met,  however,  by  a  readjustment  of  its 
corporate  affairs. 

The  economic  results  under  the  "commodity  clause"  have 
been  quite  different  from  those  doubtless  anticipated  by  Con- 
gress. A  salutary  separation  of  coal  mining  from  transporta- 
tion is  being  effected;  but  in  the  case  of  the  anthracite  properties 
at  least,  in  such  manner  as  to  hold  out  small  hope  of  any  direct 
benefit  to  the  general  public. 

Absolute  alienation  of  their  coal  properties  b}'-  the  railroads 
was  subject  to  two  difficulties.  Some  roads,  like  the  Reading 
and  the  Lehigh  Valley,  had  heavy  issues  of  bonds  outstanding, 
based  upon  the  security,  jointly,  of  both  the  railroad  and  the 
coal  properties.  The  two  could  not  readily  be  separated  with- 
out retirement  of  these  general  mortgage  bonds.  In  the  second 
place,  the  operating  relations  between  the  railroads  and  their 
subsidiary  coal  companies,  had  for  years  been  fixed  upon  the 
general  principle  of  concentrating  all  profit  from  the  two  con- 
joined transactions  of  mining  and  carriage  upon  the  trans- 
portation service  alone.  In  other  words,  freight  rates  were 
established  at  so  high  a  percentage  of  the  selling  price  of  coal  that 
mining  was  necessarily  conducted  at  a  nominal  profit,  if  any. 


554  RAILROADS 

This  made  no  difference  to  the  carriers,  owning  both  mines  and 
roads,  but  it  had  the  desired  effect  of  making  it  impossible  for 
coal  operators,  independent  of  the  raikoads,  to  engage  in  the 
business.  Without  a  modification  of  this  plan  the  coal  com- 
panies, already  separately  organized  for  the  business  by  most 
of  the  railroads,  could  hardly  be  disposed  of  to  advantage,  either 
to  the  general  public  or  even  to  their  own  shareholders.  The 
only  coal  companies  controlled  by  railroads  which  independently 
showed  a  considerable  book-keeping  profit  were  those  owned  by 
the  Jersey  Central  and  the  Delaware  and  Hudson  roads.  The 
Lehigh  Valley  Coal  Company  had  never  paid  dividends  to  its 
railroad  corporation,  but  had  contented  itself  with  providing  a 
very  profitable  tonnage.  The  Philadelphia  and  Reading  Coal 
and  Iron  Company  had  likewise  never  been  allowed  to  show  a 
book-keeping  profit  sufficient  to  meet  the  interest  upon  its 
bonds  and  to  provide  for  a  sinking  fund  against  exhaustion  of 
its  assets  under  ground. 

Despite  these  practical  obstacles,  a  general  legal  separation 
of  hard-coal  mining  from  transportation  is  in  a  fair  way  to  be 
effected.  1  The  Delaware,  Lackawanna,  and  Western  in  1909 
was  the  first  to  act.  With  no  joint  mortgages  and  a  charter 
right  to  mine  coal  directly,  it  merely  organized  a  separate  cor- 
poration, the  Delaware,  Lackawanna  and  Western  Coal  Com- 
pany. The  capital  stock  of  this  concern  was  then  distributed 
gratis  as  a  special  dividend  among  its  own  shareholders.  This 
coal  company  at  once  purchased  all  of  the  railroad's  coal  in 
stock,  leased  its  mining  appurtenances,  and  agreed  henceforth 
to  purchase  all  of  its  coal  at  the  mine  mouth  for  sixty-five  per 
cent,  of  the  tidewater  price.  The  railroad  contmued  to  mine 
coal,  but  thus  disposed  of  it  before  accepting  it  again  for  carriage. 
The  Delaware  and  Hudson  likewise  entered  into  a  contract  with 
a  coal  company  organized  in  1901,  which,  after  June,  1909, 

lA  monograph  by  Mr.  Eliot  Jones  of  Harvard  University  on  the 
anthracite  coal  business,  soon  to  be  published,  will  afford  every  detail  of 
these  transactions. 


JUDICIAL  INTERPRETATION  555 

agreed  to  purchase  all  of  its  future  output.  The  Lehigh  Valley 
Railroad  rearrangement  was  more  compHcated.  It  already  had 
a  coal  company  of  the  same  name,  the  capital  stock  of  which 
was  pledged  under  its  general  railroad  mortgage.  Ownership 
was  thus  indissoluble.  So  the  Lehigh  Valley  Coal  Sales  Com- 
pany was  organized  in  January,  1912.  Its  capital  of  $10,000,000 
was  provided  by  the  railroad,  which  declared  a  stock  dividend 
to  its  own  shareholders,  suflEicient  in  amount  to  enable  them  to 
subscribe  to  the  capital  of  the  new  concern.  This  company, 
then,  like  the  others  above  mentioned,  thereupon  agreed  to 
purchase  all  the  coal  mined  by  the  railroad's  subsidiary  coal 
corporation. 

At  this  wTiting  great  speculative  interest  attaches  to  the 
probable  plan  to  be  adopted  by  the  Reading.  Its  intricate 
organization,  1  whereby  both  the  railroad  and  the  coal  com- 
panies are  owned  by  a  purely  finance  or  holding  company, 
renders  the  problem  of  dissociation  unique.  A  large  volume 
of  joint  bonds  are  outstanding,  with  complicated  provisions 
for  sinking  funds.  The  railroad  actually  owns  no  coal  lands. 
The  coal  company,  independently,  is  not  profitable  under 
existing  traffic  arrangements.  Its  operating  ratio  in  1911  was 
98.7  per  cent.  It  is  "land  poor";  carrying  vast  reserves  of 
coal  purchased  by  bond  issues.  The  only  asset  sufficiently 
profitable  by  itself  to  make  it  attractive  as  a  gift  to  shareholders, 
is  the  subsidiary  coal  company  of  the  Jersey  Central  Railroad, 
which  is  itself  controlled  by  means  of  stock  ownership.  The 
formation  of  a  third  coal  sales  company,  whose  stock  could  be 
distributed  to  shareholders  of  the  Reading,  as  was  done  by  the 
Lehigh  Valley,  would  seem  to  be  the  only  feasible  plan. 

But  is  there  not  danger,  financially,  for  these  and  other 
railroads,  that  they  may  place  this  lucrative  traffic  in  jeopardy 
by  thus  distributing  their  coal  properties  among  shareholders 
by  means  of  stock  dividends?     While,  for  a  time,  community  of 

1  Intercorporate  Relations  of  Railways,  Special  Report,  Int.  Com. 
Com.,  1906,  p.  24. 


556  RAILROADS 

interest  between  railroad  and  coal  mine  may  be  assured  through 
lodgment  of  stock  ownership  of  both  companies  in  the  same 
persons,  is  it  not  likely  that  the  two  may  become  widely  dis- 
sociated in  the  course  of  time?  This  contingency  has  been 
guarded  against  by  an  ingenious  provision.  The  contracts 
providing  for  purchase  and  shipment  of  coal  by  the  coal  sales 
companies  are  terminable  at  the  will  of  the  railroad.  So  that 
if  conflict  of  interest  should  arise  in  future,  through  transfers 
of  stock  of  the  coal  sales  company  to  outsiders,  the  carriers 
would  be  free  to  cancel  the  arrangement;  create  another  cor- 
poration; distribute  its  shares  among  their  stockholders  once 
more;  and  thereafter  go  on  as  before.  Manifold  and  ingenious, 
indeed,  are  the  devices  of  the  law  for  purposes  of  circumvention! 
Whether  the  "commodity  clause"  is  to  bring  about  a  further 
separation  of  transportation  from  activities  of  carriers  in  other 
lines  of  business  remains  to  be  seen.  It  was  doubtless  intended 
to  have  a  general  application.  Some  roads,  other  than  those 
in  the  anthracite  coal  fields,  have  taken  steps  to  set  off  their 
subsidiary  concerns.  The  Louisville  &  Nashville,  for  example, 
has  distributed  among  its  stockholders  all  the  shares  of 
the  Louisville  Properties  Company.  This  is  a  Kentucky  cor- 
poration to  which  the  railroad  had  transferred  its  holdings  of 
coal  and  other  lands.  It  was  exi:)ected  at  the  tmie  that  its 
capital  stock  of  S600,000  would  be  worth  par.  The  Union 
Pacific  has  done  even  better.  It  voluntarily  reconveyed  to  the 
United  States  considerable  tracts  of  coal  lands,  where  title  had 
been  called  in  question  in  the  course  of  investigations  as  to  such 
railroad  ownership.  While  there  has  been  no  sign  of  the  Penn- 
sylvania Railroad  disposing  of  its  investments  in  the  Cambria 
and  Pennsylvania  Steel  Companies,  made  prior  to  1906,  it  is 
clear  that  the  interdiction  of  the  law  will  render  any  further 
outside  operations  of  this  sort  diflficult  if  not  impossible. 


CHAPTER  XVII 
THE   MANN-ELKIXS  ACT   OF   1910 

Prompt  acquiescence  by  carriers,  557.  —  Opposition  begins  in  1908,  557. 

—  Political  developments,  558.  —  President  Taft's  bill,  559.  —  Three 
main  features  of  the  new  law,  560.  —  Suspension  of  rate  changes,  561. 

—  Former  defective  injunction  procedure  remedied,  562.  —  The  new 
long  and  short  haul  clause,  564.  —  Provision  for  water  competition, 
566.  —  The  new  Commerce  Court,  566.  —  Congressional  debates,  567. 

—  Jurisdiction  of  the  new  Court,  568.  —  Its  defects,  569.  —  Prosecution 
transferred  to  the  Department  of  Justice,  570.  —  Liability  for  rate 
quotations,  571. — Wider  scope  of  Federal  authority,  572.  —  Its 
report  analyzed,    574.  —  The   Railroad    Securities    Commission,   573. 

—  The  statute  summarized,  578. 

The  course  of  events  after  1906,  so  far  as  acquiescence  in 
the  law  was  concerned,  was  precisely  like  that  of  twenty  years 
earlier.  For  some  time  the  railroads  seemed  submissive,  —  in 
almost  a  chastened  mood.  The  Conunission  also  exercised  its 
new  powers  rather  timidly.  Up  to  July  1,  1908,  only  a  single 
appeal  to  the  Federal  courts  had  been  taken  by  the  carriers 
against  orders  of  the  Commission.  A  sudden  change  of  front 
supervened  at  this  time.  During  the  second  half  of  that  year, 
sixteen  suits  to  set  aside  orders  of  the  Commission  were  filed. 
Nine  more  were  entered  m  the  following  year,  and  thirteen 
during  1910;  ^^^th  the  result  that  the  dockets  were  greatly  con- 
gested vnth  proceedings  of  this  sort.  No  less  than  thirty-six 
were  before  the  circuit  courts,  when  in  1910  they  were  all 
transferred  to  the  newly  constituted  Commerce  Court,  soon  to 
be  described.  This  accumulation  of  unfinished  business,  with 
the  consequent  delay  in  settlement  of  important  transportation 
disputes,  contributed  greatly  to  the  movement  in  Congress  in 
favor  of  further  amendment  of  the  law. 

There  were  several  reasons  for  this  sudden  shift  of  attitude 
toward  the  law  in  1908  on  the  part  of  the  carriers.     The  political 


558  RAILROADS 

atmosphere  had  suddenly  cleared  so  far  as  popular  hostility  to 
railroads  was  concerned.  A  change  of  administration  had 
ensued,  with  a  marked  preponderance  of  professional  legal 
talent  in  the  Cabinet,  And  several  important  decisions  of  the 
Supreme  Court,  once  threatening,  had  now  been  rendered  in 
favor  of  the  carriers.  Among  these  may  be  mentioned  the 
first  interpretation  of  the  "commodity  clause,"  —  on  the  one 
hand  upholding  the  constitutionality  of  the  law,  and  on  the 
other,  pointing  the  broad  and  easy  way  to  its  evasion;  the 
Harriman  decision,  protecting  witnesses  from  disclosure  of 
details  as  to  their  personal  participation  in  the  finances  of  com- 
panies under  their  control;  and  the  exculpation  of  the  Standard 
Oil  Company  by  the  aid  of  eminent  counsel  and  the  technicalities 
of  the  law,  with  escape  from  the  extreme  penalties  of  the 
statutes  for  rebating  and  personal  favoritism.  Things  seemed 
indeed  to  be  going  at  last  the  railroads'  way. 

The  brightening  financial  outlook  also  gave  better  heart  to 
the  carriers.  The  panic  of  1907,  with  its  forced  postponement 
of  ambitiously  constructive  plans,  seemed  to  have  passed. 
The  revival  of  these  projects  might  be  hampered  by  a  further 
extension  of  government  regulation  and  publicity.  Railroad 
labor,  moreover,  was  becoming  restive.  Demands  for  increased 
wages  were  imminent;  and  the  carriers  evidently  proposed  to 
shift  the  incidence  of  these  wage  increases,  if  granted,  upon  the 
public  by  means  of  an  advance  of  rates.  Such  increases  were 
bound  to  be  disputed.  It  was  deemed  important  to  test  the 
law  at  every  point.  This  need  was  the  more  imperative  as  the 
Commission  itself  was  bound  to  pass  upon  several  questions  of 
fundamental  importance,  such  as  the  adjustment  of  transcon- 
tinental freight  schedules  and  others  soon  to  be  described. 

A  presidential  campaign  took  place  in  1908.  Both  political 
parties  committed  themselves  in  their  platforms  to  still  further 
amendment  of  the  Interstate  Commerce  Law.  The  Republican 
party,  however,  modestly  confined  its  recommendations  to 
authorization  of  traffic  agreements  and  the  regulation  of  stock 


THE  ACT  OF   1910  559 

and  bond  issues  by  railroads  for  the  prevention  of  over-capitali- 
zation. The  Democrats  offered  a  much  broader  program 
providing  for  real  amphfication  of  the  power  of  the  Com- 
mission over  rates.  President  Taft,  —  well  in  advance  of  his 
party,  controlled  as  it  w^as  by  the  so-called  "regulars,"  —  offered 
soon  after  election  a  more  definite  policy.  Its  main  feature  was 
the  establishment  of  a  Court  of  Commerce  to  which  all  judicial 
re\'iew  of  orders  of  the  Commission  should  be  submitted,  in 
heu  of  revision  by  the  regularly  constituted  Federal  judiciary. 
He  e\'idently  proposed  to  seriously  amend  the  law;  but,  beyond 
the  foregoing  proposition,  most  of  the  other  details  of  his  plan 
seemed  to  be  either  half-w^ay  measures  or  else  ill-designed  to 
meet  the  real  difficulties  of  the  case.  Thus  the  proposal  to 
give  power  over  mere  rules  and  regulations  in  advance  of  their 
taking  effect,  without  at  the  same  tune  conferring  a  like  power 
to  pass  upon  the  reasonableness  of  rates  themselves,  seemed  to 
miss  the  main  point.  The  same  criticism  was  apphcable  to  the 
plan  of  conferring  authority  to  postpone  the  taking  effect  of  a 
new  classification  until  it  had  been  approved  by  the  Commis- 
sion. Other  excellent  details  were  such  as  conferred  authority 
to  compel  through  routes  and  to  forbid  stockholding  by  one 
road  in  other  competmg  lines,  set  forth  in  speeches  in  the  fall 
of  1909. 

A  special  presidential  message  of  January  7, 1910,  contained 
the  specific  program  recommended  for  legislation  to  Congress. 
It  consisted  merely  of  a  tentative  bill,  which  was  uitroduced  in 
both  houses  and  properly  referred. ^  By  this  time  the  influence 
of  the  Interstate  Commerce  Commission  in  strengthening  the 
proposals  was  apparent.  More  positive  pro\asions  were  added, 
such  as  the  right  to  suspend  rate  increases  pending  determina- 
tion of  their  reasonableness.  Serious  consideration  was  given 
this  bill  in  appropriate  committees  both  of  the  House  and 

1  Characterized  somewhat  heatedly  by  Senator  La  FoUette  in  his  Auto- 
biography (American  Magazine,  1912,  p.  189),  as  "in  all  the  history  of 
raih-oad  legislation,  the  rankest,  boldest  betrayal  of  pubhc  interest  ever 
proposed  in  any  legislative  body." 


560  RAILROADS 

Senate.  It  was,  in  fact,  with  the  consent  of  the  Attorney- 
General,  amended  out  of  all  semblance  to  its  original  form. 
The  most  serious  changes  were  made  in  the  Committee  on 
Interstate  Commerce  of  the  House  of  Representatives.  The 
coalition  of  Democrats  and  "insurgent"  or  "progressive" 
Republicans,  succeeded  in  striking  out  the  authorization  of 
traffic  agreements,  as  well  as  a  proposition  permitting  a  railroad 
owning  a  majority  of  stock  in  other  non-competing  lines  to 
purchase  the  balance  of  their  shares.  Several  radical  amend- 
ments of  the  Commerce  Court  plan  were  likewise  effected; 
especially  those  giving  the  power  of  appointment  to  the  Chief 
Justice  instead  of  the  President.  The  hands  of  the  "progres- 
sives" in  all  this  work  were  considerably  strengthened,  with- 
out doubt,  by  the  course  of  events  during  the  spring  months 
of  1910,  especially  the  impending  general  increase  of  freight 
rates  all  over  the  country. 

The  strength  of.  political  sentiment  in  favor  of  the  measure 
appears  in  the  fact  that  the  radical  House  bill  was  passed 
unanimously;  while  the  Senate  bill  was  adopted  by  a  solid 
RepubHcan  vote  with  the  aid  of  six  Democrats,  —  the  total  vote 
being  fifty  to  eleven.  Reference  to  a  conference  committee, 
which  considered  it  for  ten  days,  still  further  modified  the 
original  plan.  Pooling  was  dropped  entirely;  stockwatering 
and  details  of  inter-corporate  finance  between  non-competing 
lines  were  also  thrown  out  as  favoring  the  carriers  unduly. 
Physical  valuation,  as  provided  in  the  House  bill,  was  con- 
siderably restricted.  Prompt  approval  of  the  conference  bill 
followed  in  both  houses.  And  the  signature  of  the  President 
was  added  on  June  18.  Thus  did  the  Mann-Elkins  "Amend- 
ments" become  law. 

The  three  most  important  features  of  tjie  Mann-Elkins  Act  ^ 
were:   the  grant  of  power  to  suspend  changes  in  rates  for  ex- 

iThe  best  references  are  the  following:  —  F.  H.  Dixon,  Quarterly 
Journal  oj  Economics,  vol.  XXIII,  1910,  pp.  593-633;  reprinted  in  the 


THE  ACT  OF  1910  561 

amination  as  to  their  reasonableness;  resuscitation  of  the  long 
and  short  haul  clause;  and  the  creation  of  the  Commerce  Court 
for  re\'iew  of  the  Commission's  orders.  Of  these,  the  first  two 
represent  substantial  extension  of  the  regulative  power  of  the 
govermnent;  the  third  being  a  mere  modification  of  procedure 
on  appeal. 

The  proposition  to  so  amend  Section  15^  of  the  Act  of  1887 
as  to  confer  power  upon  the  Commission  to  suspend  proposed 
changes  in  rates,  seems  to  have  been  a  feature  added  at  the 
behest  of  the  insurgent-Democratic  coalition  in  Congress.  It 
was  neither  in  the  President's  first  unofficial  program  nor  in 
the  formal  bill  dra^^^l  up  by  the  Attornej^-General.  The 
intolerable  obstructions  in  the  way  of  prompt  determination  of 
transportation  disputes  incident  to  the  practical  working  of  the 
law,  even  since  1906,  had  created  a  renewed  demand  for  relief. 
Great  force  was  added  to  this  demand  among  shippers  by  the 
rate  advances  which  had  been  occurring  all  along  the  line  for 
two  years;  and  particularly  by  the  rumors  of  a  general  rate 
advance  by  the  western  and  trunk  fine  roads  during  the  progress 
of  the  debate  upon  the  bill.  The  President,  to  be  sure,  blocked 
this  advance  by  means  of  a  clever  legal  and  pohtical  move. 
On  May  31  an  injunction  was  issued  against  twenty-four 
carriers,  temporarily  restraining  them  from  putting  into  effect 
higher  tariffs,  as  they  had  planned  on  June  1.  This  action  was 
taken  upon  the  allegation  that  the  simultaneous  action  of  all 
these  roads  in  so  doing  constituted  a  violation  of  the  Anti- 
Trust  Law.  The  injunction,  which  as  a  weapon  had  been 
turned  mainly  by  the  carriers  against  enforcement  of  the  orders 
of  the  Commission,  was  now  invoked  against  the  railroads. 
Regardless  as  to  whether  a  bona  fide  prosecution  was  contem- 
plated, the  effect  of  these  equity  proceedings  was  to  secure 

Railway  Age  Gazette,  vol.  XLIX,  p.  688  et  seq;  American  Political  Science 
Review,  vol.  IV,  1910,  pp.  537-554.  Our  other  sources  are  the  files  of  the 
Annual  Reports  of  l.C.C;  the  Congressional  Record,  Railway  Age  Gazette, 
and  daily  press  reports.  ^  P-  452,  supra. 

VOL.  I — 36 


562  RAILROADS 

postponement  of  the  advance  in  rates;  and,  of  course,  at  the 
same  time  forcibly  to  attract  the  attention  of  Congress  to  the 
necessity  of  control.  The  carriers  withdrew  their  tariffs  in 
some  discomfiture;  the  injunctions  were  dissolved;  and  all 
proceedings  were  stopped. 

It  is  unnecessary,  perhaps,  to  repeat  the  demonstration  that  a 
loss  by  shippers  once  incurred  through  payment  of  an  unreason- 
able rate,  is  irretrievable.  The  manner  in  which  transportation 
costs  enter  into  the  profitableness  of  contracts  by  the  shipper  for 
future  delivery  is  well  known.  ^  Any  change  of  rates  during  a  pe- 
riod for  which  shippers  have  contracted  to  deliver  at  fixed  prices, 
must  seriously  affect  the  chances  of  profit.  It  was  recognized 
as  essential,  therefore,  that  adequate  protection  for  the  shipper 
could  be  given  only  through  suspension  of  any  change  in  rates 
until  the  reasonableness  of  that  change  had  been  determined. 

The  extent  to  which  the  aid  of  the  courts  had  been  invoked 
by  the  carriers  to  set  aside  orders  of  the  Commission  has  already 
been  described.  Proceedings  on  the  equity  side  in  the  courts 
had  also,  although  in  a  most  unsatisfactory  manner,  been  under- 
taken to  restrain  advances  in  rates.  But  in  all  cases  the  exercise 
of  this  power  had  been  bitterly  contested,  and  proved  at  best 
to  be  so  cumbersome  as  to  be  almost  futile.  The  utmost  con- 
fusion resulted  in  some  cases.  For  example,  in  1908  the  carriers 
filed  notice  of  an  advance  in  rates  on  boots  and  shoes  from  New 
England  to  the  South.  An  injunction  was  obtained  prohibiting 
such  advance,  on  condition  that  application  be  immediately 
made  to  the  Commission  for  a  ruling  upon  the  reasonableness 
of  the  proposed  change.  This  would  have  left  the  carriers 
without  choice  except  to  collect  one  rate  while  continuing  to 
publish  another.  They  therefore  withdrew  their  schedules, 
leaving  the  old  rates  in  effect.  As  a  result  no  complaint  could 
be  filed  with  the  Commission,  the  new  rate  not  having  come  into 
operation.     To  meet  this  situation,  the  court  then  so  modified 

'  Concrete  instance  in  17  I.C.C.  Rep.,  p.  317.  Also  p.  510,  supra,  and 
587,  infra. 


THE  ACT  OF   1910  563 

its  injunction  that  carriers  might  publish  the  advanced  schedule, 
but  were  restrained  from  collecting  it.  This  was  manifestly 
an  absurd  situation.  Moreover,  supposing  that  the  Com- 
mission could  immediately  take  up  the  question,  no  order  could 
become  effective  until  after  thirty  days.  In  the  meantime,  the 
whole  matter  must  remain  in  suspense.  Considering  that 
15,000  tariffs  advancing  rates  in  trunk  hue  territory  alone, 
were  filed  in  July,  1910,  the  necessary  delay  incident  to  such 
roundabout  procedure  would  render  it  intolerable.  Other 
complications  might  be  mentioned,  such  as  the  localization  of 
injunctions  within  the  territorial  jurisdiction  of  the  enjoining 
court;  legal  technicalities  touching  the  filing  of  bonds;  and  the 
status  of  non-petitioning  shippers.  Speedy  relief  must  be  had : 
that  was  clear  beyond  question. 

Aside  from  the  practical  unworkableness  of  the  injunction 
process  as  a  protection  against  unreasonable  rate  advances, 
reform  might  well  be  demanded  on  grounds  of  fairness.  No 
reduction  of  rates  ought  to  be  compelled  without  opportunity 
for  protest  by  the  carrier.  Contrariwise,  no  new  burden  should 
be  laid  upon  the  shipper  without  a  hearing.  The  burden  of 
proof  against  disturbance  of  a  long-standing  adjustment  ought 
properly  to  rest  upon  the  party  responsible  for  the  change. 
Such  delay  as  was  requisite  for  determination  of  the  reasonable- 
ness of  the  change  could  not  constitute  a  serious  burden; 
and  even  if  it  did,  it  was  but  just  under  the  attendant 
circumstances. 

The  new  law  yielded  to  these  arguments  by  a  radical  exten- 
sion of  the  authority  of  the  Commission.  It  was  authorized  to 
suspend  the  taking  effect  of  any  new  rate  or  regulation  for  not 
more  than  one  hundred  and  twenty  days,  to  afford  opportunity 
for  hearing  and  decision  as  to  its  reasonableness.  If  necessary, 
a  further  period  of  six  months'  suspension  might  be  had.  IMore- 
over,  the  burden  of  proof  that  the  change  was  just  and  reasona- 
ble was  laid  upon  the  carrier.  Beyond  the  ten  months'  period 
thus  allowed,  postponement    might  not    extend.     Thereafter 


564  RAILROADS 

the  rates  became  effective  automatically.  This  control  fell 
short  of  the  demand  of  the  "insurgents"  that  downright 
approval  of  the  Commission  for  all  changes  should  be  required; 
but  it  was,  nevertheless,  a  substantial  increase  of  power.  It 
remains  to  be  seen  what  the  practical  result  of  this  great  ex- 
tension of  government  control  may  be.  It  was  predicted  that 
its  greatest  benefit  would  come  from  those  suspensions  of  rate 
advances  which  ultimately  brought  about  their  withdrawal.^ 
This  prophecy  was  fulfilled,  as  will  be  seen  in  the  next  chapter, 
in  the  first  great  test  to  which  the  law  was  put,  almost  immedi- 
ately after  its  passage. 

Resuscitation  of  the  long  and  short  haul  clause  of  the  Act 
of  1887  was  the  second  important  feature  of  the  new  legislation. 
The  long  and  tedious  j^rocess  of  judicial  interpretation,  by  means 
of  which  this  section  of  the  statute  was  nullified  for  so  many 
years,  has  already  been  set  forth.-  Dissatisfaction  with  the 
local  discrimination  prevalent  throughout  the  southern  states 
and  in  the  Rocky  mountain  region  had  been  steadily  increasing 
for  a  long  time.  Public  opinion  in  these  districts  urgently 
demanded  the  rehef  which  the  original  law  sought  to  afford. 
Chairman  Knapp  fairly  described  the  situation  in  1905  before 
the  Elkins  Committee  as  follows:^  —  "No  one,  I  think,  can 
read  the  Fourth  section  ....  and  be  in  doubt  that  Congress 
intended  to  provide  some  actual  and  potential  restraint  upon 
that  particular  form  of  discrimination.  And,  I  may  say,  it 
remains  today  much  as  it  was  then,  not  the  greatest  evil,  but 
the  most  irritating  and  obnoxious  form  of  discrimination  that 
has  been  encountered."  No  distributing  business  could  hope 
to  become  established  in  the  West  or  South  without  vitalizing 
this  section  of  the  law.  The  larger  cities,  and  particularly  the 
manufacturing  districts  in  the  East,  on  the  other  hand,  viewed 
with  alarm  any  encroachment  upon  the  far  distant  markets 

^  The  suspension  of  increased  rates  on  Maine  potatoes  in  October,  1912, 
long  enough  to  permit  the  entire  season's  crop  to  be  marketed  on  the  old 
tariffs  is  a  case  in  point. 

2  P.  474,  supra.  ^  Volume  IV,  p.  3293. 


THE  ACT  OF   1910  565 

which  they  were  able  to  hold  by  reason  of  peculiarly  low  rates. 
The  railroads'  cooperation  with  eastern  representatives  in 
Congress  had  successfully  prevented  any  change  in  1906. 
But  four  years  later  it  became  apparent  early  in  the  debates  that 
something  would  have  to  be  done  for  the  relief  of  the  West  and 
South. 

The  long  and  short  haul  clause  was  amended  by  the  influ- 
ence of  the  Progressive  Republicans  in  the  House. ^  Four  changes 
were  made.  The  first  was  the  total  elimination  of  the  clause 
"under  substantially  similar  circumstances  and  conditions," 
which  had  been  responsible  for  almost  all  of  the  trouble  in  the 
courts.  This  change  made  it  necessary  in  all  cases  in  future  for 
permission  to  be  secured  in  advance  from  the  Commission  for 
any  lesser  charge  for  a  long  haul  than  for  a  shorter  one,  no 
matter  what  the  local  circumstances  might  be.  Secondly,  the 
prohibition  was  specifically  made  to  cover  "routes"  as  well  as 
"lines."  Although  the  Osborne  case  ^  had  already  virtually 
made  it  clear  that  the  clause  applied  to  a  series  of  connecting 
railways  as  well  as  to  a  single  companj^  this  addition  placed  the 
matter  beyond  dispute.  The  third  change,  practically  legalizing 
a  standing  rule  of  the  Commission  for  many  years,  prohibited 
a  higher  through  rate  than  the  sum  of  the  local  charges  over  the 

1  The  following  is  the  form  in  which  the  Fourth  Section  now  stands: 

"Section  4.  That  it  shall  be  unlawful  for  any  common  carrier  subject  to  the  pro- 
visions of  this  act  to  charge  or  receive  any  greater  compensation  in  the  aggregate  for  the 
transportation  of  passengers,  or  of  like  kind  of  property,  for  a  shorter  than  for  a  longer  dis- 
tance over  the  same  line  or  route  in  the  same  direction,  the  shorter  being  included  within 
the  longer  distance,  or  to  charge  any  greater  compensation  as  a  through  route  than  the 
aggregate  of  the  intermediate  rates  subject  to  the  pro\'isions  of  this  act;  but  this  shall  not 
be  construed  as  authorizing  any  common  carrier  within  the  terms  of  this  act  to  charge  or 
receive  as  great  compensation  for  a  shorter  as  for  a  longer  distance:  Provided,  however, 
That  upon  application  to  the  Interstate  Commerce  Commission  such  common  carrier  may 
in  special  cases,  after  investigation,  be  authorized  by  the  Commission  to  charge  less  for 
longer  than  for  shorter  distances  for  the  transportation  of  passengers  or  property;  and  the 
Commission  may  from  time  to  time  prescribe  the  extent  to  which  such  designated  common 
carrier  may  be  relieved  from  the  operation  of  this  section:  Provided,  further.  That  no 
rates  or  charges  lawfully  existing  at  the  time  of  the  passage  of  this  amendatory  act  shall  be 
required  to  be  changed  by  reason  of  the  provisions  of  this  section  prior  to  the  expiration  of 
six  months  after  the  passage  of  this  act.  nor  in  any  case  where  application  shall  have  been 
filed  before  the  Commission,  in  accordance  with  the  provisions  of  this  section,  until  a 
determination  of  such  application  by  the  Commission. 

Whenever  a  carrier  by  railroad  shall  in  competition  with  a  water  route  or  routes  reduce 
the  rates  on  the  carriage  of  any  species  of  freight  to  or  from  competitive  points,  it  shall  not 
be  permitted  to  increase  such  rates  unless  after  hearing  by  the  Interstate  Commerce  Com- 
mission it  shall  be  found  that  such  proposed  increase  rests  upon  changed  conditions  other 
than  the  elimination  of  water  competition." 

^  P.  476,  supra. 


566  RAILROADS 

same  line.^  An  addition  covering  an  entirely  new  point  con- 
stituted the  fourth  modification  of  the  section.  It  is  suggestive 
as  an  indication  of  the  determined  spirit  which  animated  Con- 
gress. This  last  detail  was  borrowed  from  the  then  recently 
submitted  report  of  the  National  Waterways  Commission, 
which  in  turn  had  borrowed  it  from  the  state  constitution  of 
California.  It  was  intended  to  meet  the  tactics  so  often 
adopted  by  land  carriers  in  competition  with  water  lines,  of 
drastically  reducing  rates  until  the  competition  by  water  had 
been  killed,  after  which  the  losses  were  recouped  by  even  higher 
tariffs  than  before.^  Under  the  new  law,  no  railroad,  having 
once  reduced  its  rates  in  competition  with  a  water  route,  was 
permitted  to  increase  those  charges  until  the  Interstate  Com- 
merce Commission  should  have  found  that  such  proposed 
increase  rested  upon  changed  conditions  other  than  the 
elimination  of  water  competition. 

Improvement  of  the  procedure  on  appeal,  by  the  establish- 
ment of  the  Commerce  Court,  was  the  third  important  feature 
of  the  new  law.  It  was  not  only  the  delay  of  which  complaint 
was  made,  but  the  illogical  process  of  review  as  well.     For  this 

1  Cf.  the  example  on  p.  590,  infra. 

2  The  following  account,  by  W.  M.  Acworth  in  the  Raihvay  Age  Gazette, 
of  a  conversation  with  the  late  Collis  P.  Huntington  illustrates  the  possible 
abuse: 

"The  Southern  Pacific  built  two  fine  steamers  to  run  between  San  Francisco  and  Sac- 
ramento, Cal.  They  gave  a  daily  service,  each  boat  running  up  one  day,  and  down  the 
next,  and  the  passenger  fare  was  $2.  A  private  individual  thought  he  saw  his  way  to 
compete  with  advantage,  and  bought  a  smaller  boat,  which  only  gave  a  service  every  other 
day,  but,  on  the  other  hand,  only  charged  $1  for  this  service. 

"  The  Southern  Pacific  began  to  lose  money,  and  when  Mr.  Huntington  next  came  to 
California  the  position  was  put  before  him.  'Would  you  like  to  leave  me  to  run  this 
fight?'  said  he  to  the  local  manager.  'Certainly,  sir,'  was  the  reply.  'Is  there  an  old 
boat  you  can  buy  that  could  give  a  service? '  Being  told  that  there  was,  Mr.  Huntington 
bought  it,  ordered  the  two  first-class  boats  to  be  laid  up,  and  announced  that  the  new  pur- 
chase would  run  alongside  the  rival  boat  at  a  fare  of  50  cents.  '  Why,  sir,'  said  the  local 
manager,  '50  cents  won't  pay  for  the  coal.'  'No,  I  do  not  sujjpose  it  will,'  was  the  answer, 
'but  when  you  go  to  war  you  have  got  to  fight!" 

"Before  long  the  owner  of  the  rival  boat  came  to  Mr.  Huntington  and  asked  him  what 
he  was  prepared  to  do  about  it.  Mr.  Huntington  replied  that  he  would  buy  his  boat  for 
$10,000  —  I  think  the  sum  was.  'But,  Mr.  Huntington,  the  boat  cost  me  .'820,000,  and 
she  is  worth  it.'  '  Very  likely,  but  I  am  only  going  to  give  you  $10,000.'  So  the  fight  went 
on  for  a  while  longer.  When  the  spring  came  Mr.  Huntington  was  on  the  point  of  return- 
ing to  New  York.  He  sent  word  to  his  rival  that  he  was  leaving  California  the  following 
week,  and  that  if  the  matter  was  not  settled  before  he  left,  his  50-cent  boat  would  continue 
to  run  till  his  return  the  following  winter.  Whereupon  his  competitor  at  once  threw  up 
the  sponge  and  then  sold  his  boat  for  $10,000.  'Since  then,'  concluded  Mr.  Huntington, 
'  there  has  been  no  competition  with  the  Southern  Pacific  on  the  Sacramento  river.'  " 


THE  ACT  OF   1910  567 

permitted  the  orders  of  a  technically  expert  commission  of 
seven  men  to  be  set  aside  by  the  order  of  a  single  judge  who,  in 
fact,  relied  upon  subordinates  for  an  examination  of  the  evi- 
dence as  to  economic  fact.  This  may  be  illustrated  by  two 
recent  cases.  In  1907  the  transcontinental  railroads  sub- 
stantially increased  their  rates  on  lumber.  The  Commission 
held  that  this  advance  was  imreasonable;  but  permitted  one  half 
of  it  to  take  place.  The  carriers  appealed  to  the  Federal 
Circuit  Court.  All  the  evidence,  involving  great  money  and 
commercial  considerations,  was  taken  for  the  court  by  a  master. 
Upon  the  findings  of  this  single  individual,  without  opportunity 
for  the  court  to  critically  examine  the  evidence,  the  deliberate 
judgment  of  the  Interstate  Commerce  Commission  was  set  aside. 
The  same  thing  happened  in  the  Texas  Cattle  Raisers'  case  in 
1910,  involving  rates  on  live  stock  from  the  southwest  to 
northern  ranges.  In  this  instance,  to  be  sure,  the  Circuit 
Court  declined  to  enjoin  the  Commission.  That  did  not, 
however,  alter  the  fact  that  the  decision  was  based  upon  hearings 
by  a  master,  extending  over  sixty-three  days  and  rolling  up  a 
voluminous  record  which  the  court  did  not  have  time  even  to 
peruse  cursorily.  To  standardize  procedure,  as  well  as  to 
eliminate  delay,  was  the  purpose  of  the  President  in  the  plan 
for  the  Commerce  Court. 

Many  objections  were  advanced  in  the  course  of  debate 
in  Congress  against  the  creation  of  a  special  tribunal.  It  was 
urged  that  such  a  court  with  limited  jurisdiction  would  be  open 
to  political  influence,  as  well  as  exposed  to  the  danger  of  narrow- 
ness. It  was  said  to  be  foreign  to  our  judicial  organization, 
which  heretofore  had  knowTi  only  courts  of  general  jurisdiction. 
It  was  stated  that  no  necessity  for  a  commerce  court  existed, 
so  small  would  be  the  number  of  cases  which  might  be  brought 
before  it.  Objection  was  also  raised  to  it  on  the  ground  of 
expense.  The  problem  of  court  review  was,  of  course,  compli- 
cated rather  than  made  more  simple  by  the  Hepburn  Act  of 
1906.     Prior  to  that  time  no  administrative  orders  took  effect 


568  RAILROADS 

other  than  through  enforcement  by  the  courts.  But  this  law- 
provided  that  rates  and  regulations  of  the  Commission  should 
take  effect  proprio  vigore  within  thirty  days.  The  contest  over 
broad  v.  narrow  court  review  has  already  been  described, 
with  the  outcome  at  the  time  regarded  as  a  victory  for  broad 
review.  The  situation  was  entirely  changed,  however,  by  the 
Illinois  Central  decision  in  1910,^  which  appeared  to  put  a 
restraint  upon  judicial  review,  except  when  the  order  of  the 
Commission  was  either  beyond  its  legal  powers  or  else  uncon- 
stitutional. This  decision  did  not,  as  might  have  been  expected, 
put  an  end  to  the  plan  for  a  new  transportation  court;  but  it 
did  bring  about  a  specific  restriction  of  the  powers  of  this 
tribunal  to  those  possessed  by  the  regular  circuit  courts. 

The  Commerce  Court,  as  finally  constituted  in  1910,  was 
composed  of  five  judges,  each  to  serve  for  five  years,  designated 
and  assigned  thereto  by  the  Chief  Justice  of  the  Supreme  Court 
from  among  the  circuit  judges  of  the  United  States.  No 
member  might  serve  continuously  for  more  than  one  term, 
but  might  be  reappointed  after  an  interval  of  one  year.  The 
court  was  to  sit  at  Washington,  and  was  to  be  always  open  for 
the  transaction  of  business.  From  it,  direct  appeal  to  the 
Supreme  Court  might  be  taken,  with  as  simple  a  mode  of  proce- 
dure as  possible  to  eliminate  delay.  The  original  record,  for 
example,  was  to  be  transmitted;  and  agents  of  every  carrier 
must  be  designated  at  Washington  upon  whom  process  might 
at  any  time  be  served.  Whatever  may  be  said  of  other  details 
of  this  judicial  experiment,  it  certainly  sought  in  good  faith  to 
promote  promptness  in  procedure. 

The  jurisdiction  of  this  Commerce  Court  w^as  expressly 
conferred  over  four  kinds  of  cases :  ^ 

First,  those  for  enforcement  of  any  order  of  the  Interstate 
Commerce  Commission,  other  than  the  payment  of  money. 

^  Page  538,  supra. 

2  Opinion  No.  44,  1911,  is  the  first  Commerce  Court  case  to  interpret 
this  jurisdiction.     Cf.,  also,  p.  587,  supra. 


THE  ACT  OF   1910  569 

Second,  cases  brought  to  enjoin,  set  aside,  annul  or  sus- 
pend, in  whole  or  in  part,  any  order  of  the  Commission. 

Third,  all  proceedings  on  appeal  under  the  Elkins  amend- 
ments of  1903  with  reference  to  rebates  or  departure  from  the 
published  tariffs. 

Fourth,  all  proceedings  concerning  the  enforcement  of  the 
law  in  respect  of  publicitj^  of  accounts,  the  furnishing  of  facili- 
ties, or  compulsion  in  the  movement  of  traffic. 

Proceedings  in  the  first  class  above  mentioned,  for  enforce- 
ment of  orders  of  the  Commission,  remained  practically  un- 
changed in  form,  except  that  they  were  to  be  prosecuted  in  the 
Commerce  Court  instead  of  in  the  ordinary  circuit  courts. 
Cases  of  the  second  sort,  wherein  the  carrier  sought  to  enjoin 
or  set  aside  orders  of  the  Commission,  were  somewhat  modified 
in  procedure.  The  Administration  bill  provided  that  the 
Commerce  Court  should  not  issue  injunctions,  except  in  cases 
where  irreparable  damage  would  follow.  In  this  regard,  the 
Senate  succeeded  in  somewhat  amplifying  judicial  control. 
Five  daj's'  preliminary  notice  to  the  Commission,  secured  in 
1906  after  a  bitter  contest,  was  now  cut  down  to  three  days; 
and  the  full  court  might  extend  the  temporary  stay  of  sixty 
days  granted  by  a  single  judge,  over  the  entire  period  necessary 
for  final  decision  by  the  Supreme  Court.  With  this  exception, 
the  new  law  held  all  the  ground  gained  by  the  Hepburn  Act  as 
judicially  interpreted  in  the  Illinois  Central  case. 

The  principal  criticism  which  may  be  directed  against  the 
Commerce  Court,  as  thus  organized,  is  that,  instead  of  being  an 
unchanging  body  of  judges,  becoming  expert  in  the  details  of 
transportation  by  long  experience,  its  membership  must  change 
year  by  year.  Fortunately,  at  the  outset  the  court  was  favored 
by  the  appointment,  as  presiding  justice,  of  the  Chairman  of 
the  Interstate  Commerce  Commission;  but  it  seems  likely  that 
the  lack  of  experience  and  technical  knowledge  in  this  ever- 
changing  body  may  render  it  an  obstruction  rather  than  an 
assistance  in  fixing  the  responsibility  for  the  settlement  of  these 


570  RAILROADS 

important  cases.  Specialization  ought  to  be  as  beneficial  here 
as  in  all  other  departments  of  government.  It  is  a  pity  that 
the  original  plan  of  a  permanent  court  should  finally  have  been 
changed,  through  the  insistence  of  the  carriers'  representatives, 
to  a  tribunal,  each  of  whose  members  no  sooner  becomes  profi- 
cient in  the  details  of  his  work  than  he  is  marked  for  transfer  to 
other  fields  of  activity. 

Next  to  the  creation  of  the  Commerce  Court,  the  most 
important  change  in  procedure  introduced  in  1910  was  the 
transfer  of  the  task  of  prosecuting  suits  on  appeal  cases  from  the 
Interstate  Commerce  Commission  to  the  Federal  Department  of 
Justice.  The  confusion  of  governmental  powers  in  the  past, 
through  permitting  the  Commission  to  prosecute  cases  in  the 
Federal  courts  in  which  it  already  had  an  interest,  has  already 
been  described.  It  was  obviously  illogical  that  a  body  having 
once  rendered  an  opinion  should  then  appear  in  court  in  defence 
of  its  own  order.  The  jealousy  of  the  Department  of  Justice 
in  this  regard  was  probably  responsible  also  for  the  change 
effected  in  the  law.  The  amendment  of  1910  provides  that 
hereafter  all  cases  and  proceedings,  either  in  the  Commerce 
Court  or  the  Supreme  Court,  shall  be  brought  in  the  name  of  the 
United  States  under  the  charge  and  control  of  the  Attorney- 
General.  It  was  provided  also  that  the  Commission  or  "any 
party  or  parties  in  interest"  might  appear  of  their  own  motion 
and  as  of  right,  and  might  be  represented  by  counsel.  Com- 
munities, associations,  or  individuals  interested  in  the 
controversy  were  authorized  to  intervene,  and  the  Attorney- 
General  was  forbidden  to  discontinue  any  proceedings  over  the 
objection  of  such  parties  in  interest.^  This  apparently  reason- 
able procedure  was  authorized  after  vehement  protest  of  ship- 
pers against  the  original  administration  program.  The  Senate 
objected  to  it  on  the  ground  that  it  "would  introduce  intolerable 
confusion  in  legal  proceedings  and  subordinate  the  general 
interests  of  all  the  people  to  the  selfish  concerns  of  one  or  more 

'  191  Fed.  Rep.,  37,  first  interprets  this  clause.     P.  587,  infra. 


THE  ACT  OF   1910  571 

parties."  And  the  Commission  insisted  throughout  that  it 
must  participate  in  such  suits,  else  no  competent  parties  would 
be  at  hand  to  guide  the  prosecution  in  complicated  proceedings. 
Several  provisions  in  the  law  were  aimed  at  specific  abuses 
which  had  been  revealed  in  the  course  of  prosecutions  under 
the  criminal  provisions  of  the  Act.  The  original  law  provided 
for  the  posting  of  tariffs  in  public  places,  in  order  that  shippers 
might  inform  themselves  as  to  the  scheduled  rates.  But  the 
possibilities  of  concealment  of  special  favors,  as  well  as  the  mere 
mechanical  difficulty  of  ascertaining  the  facts  in  so  complicated 
a  maze  of  descriptions  and  rules  with  all  sorts  of  exceptions,  made 
it  necessary  that  the  shipper  should  rely  upon  information 
obtained  from  the  agent.  Nor  could  the  shipper  recover  for 
losses  incurred  through  misquotation  of  the  rate  by  this  agent 
inasmuch  as  the  carriers  must  collect  according  to  the  tariff, 
under  severe  penalties  for  departure  therefrom.  Even  a  mistake 
by  the  agent  in  quoting  the  WTong  rate  did  not  permit  of  re- 
covery. The  new  law  met  this  contingency  by  the  requirement 
that  the  railroad  should  quote  the  rate  upon  WTitten  request; 
and  should  be  liable  to  a  penalty  of  S250  for  mis-statement  from 
which  loss  to  the  shipper  should  result.  The  requirement  that 
both  the  request  and  the  reply  as  to  rates  should  be  WTitten, 
it  was  hoped,  would  facilitate  detection  of  rebating  in  the  future. 
Another  clause  added  a  penalty  of  $1000  and  made  it  a  mis- 
demeanor for  any  carrier  or  its  agent  to  disclose  information 
concerning  either  the  route  or  destination  of  any  shipment, 
when  such  information  might  be  used  to  the  injury  of  a  com- 
peting shipper.  Solicitation  of  such  information  was  also 
penalized.  The  abuse  against  which  this  provision  of  law  was 
directed  is  well  illustrated  in  the  prosecution  of  the  so-called 
Powder  Trust  in  1911.  It  appeared  in  one  instance  that  a 
freight  agent  had  been  paid  from  $15  to  $18  a  month  for  furnish- 
ing weekly  statements  of  the  shipments,  with  addresses  of  con- 
signees, made  by  a  competing  concern  in  Chattanooga.^  Such 
1  Quarterly  Journal  of  Economics,  XXVI,  1912,  p.  444. 


572  RAILROADS 

outrageous  espionage,  long  practised  by  the  Standard  Oil 
Company,  it  is  to  be  hoped  will  be  eliminated  in  future  by  this 
provision  of  law. 

Certain  details  of  the  act  may  be  dismissed  with  mere 
mention.  The  scope  of  regulation  was  extended  to  include 
telegraph,  telephone,  and  cable  companies.  The  Commission 
was  specifically  authorized  to  establish  and  enforce  reasonable 
classification  of  freight.  Such  authority,  to  be  sure,  had  been 
continuously  exercised  for  years;  but  this  clause  put  it  beyond 
dispute.  A  leaf  was  taken  from  the  experience  before  the 
Supreme  Court  in  interpretation  of  the  authority  over  through 
routes  and  joint  rates  in  the  "Portland  Gateway"  case,  de- 
scribed in  the  preceding  chapter.  Other  "reasonable  or  satis- 
factory routes"  were  more  specifically  defined;  although  the 
compUcated  phraseology  adopted  was  of  doubtful  value.  It 
may  well  be  that  the  clause,  under  judicial  interpretation,  lim- 
ited rather  than  amplified  the  Commission's  power  as  compared 
with  the  law  of  1906.  But  the  added  requirement  that  every 
carrier  must  provide  reasonable  facilities  for  the  operation  of 
through  routes,  proper  rules  for  the  interchange  of  cars,  etc., 
was  bound  to  promote  the  efficiency  of  through  business.  The 
experience  in  the  "Orange  Routing"  cases,  also,  brought  about 
a  clear  affirmation  in  the  new  statute  of  the  right  of  a  shipper  to 
designate  the  route  which  he  preferred  for  shipment  over  con- 
necting hnes.  The  shipper  might  also  demand  a  bill  of  lading 
conformable  to  his  instructions.  Whether  this  freedom  of 
choice  to  the  shipper,  with  the  incidental  assumption  of  re- 
sponsibility for  all  consequences,  regardless  of  strikes,  blockades, 
or  acts  of  God,  will  work  to  his  advantage  in  the  long  run  re- 
mains to  be  seen.  He  may  probably  rely  upon  strict  enforce- 
ment of  the  so-called  Carmack  amendment  of  1906,  which 
makes  the  initial  carrier  liable  for  damage,  even  if  it  occurs  off 
its  own  line.  And,  finally,  among  the  minor  changes  in  1910  was 
the  authorization  of  the  Commission  to  institute  inquiries  upon 
its  own  initiative.     Such  power  had  frequently  been  exercised; 


THE  ACT   OF   1910  573 

but  in  the  enactment  of  the  Hepburn  Act  four  years  before,  cer- 
tain verbal  inconsistencies  were  introduced  into  Section  15.  It 
was  deemed  best  to  remedy  this  error  by  complete  authorization 
to  undertake  investigations  either  with  or  without  complaint.^ 

In  place  of  regulation  of  the  issues  of  stocks  and  bonds  by 
Federal  authority,  as  pledged  in  the  political  platforms,  the 
almost  unanimous  opposition  in  the  Senate  to  such  a  plan, 
brought  about  the  substitution  of  a  Railroad  Securities  Com- 
mission to  investigate  the  subject.  This,  after  all,  was  probably 
wdse;  inasmuch  as  many  details  as  to  conflicting  state  and 
Federal  powers  in  such  matters,  were  yet  to  be  determined 
judicially.  Moreover,  the  plans  proposed,  as  it  appeared,  were 
so  complicated  that  their  adoption  might  result  in  the  valida- 
tion of  all  capitalization  then  outstanding  ■without  reference 
to  its  real  value.  The  question  certainly  merited  further  in- 
vestigation at  the  hands  of  experts. 

Under  the  authority  above  mentioned,  the  President  ap- 
pointed an  able  although  distinctly  conservative  commission, 
headed  by  President  Hadley  of  Yale  University.  This  body 
rendered  its  report  in  November,  1911.^  The  document  was 
concise,  cogent  in  reasoning  (with  the  exceptions  noted  below), 
wise  in  its  general  conclusions  and  eminently  conciliatory  in 
spirit.  It  was  ob\'iously  intended  to  promote  good  relations 
between  the  government  and  the  carriers.  The  dominant 
note  was  complete  publicity  as  a  corrective  for  all  financial 
abuses  of  the  time.  The  adequacy  of  this  remedy  was  probably 
exaggerated.  The  wise  accounting  provisions  of  the  Acts  of 
1906-1910  ^  were  certainly  already  far-reaching  in  effect.  The 
Securities  Commission  proposed,  however,  that  they  be  elabo- 
rated to  cover  fully  all  phases  both  of  promotion  and  of  subse- 
quent finance. 

^  Cf.  p.  537,  supra. 

^  Report  of  the  Railroad  Securities  Commission,  Nov.  1,  1911. 

'  Page  515,  supra. 


574  RAILROADS 

Not  less  important  and  wise  than  the  insistence  upon 
financial  publicity,  was  the  recommendation  that,  until  the 
Supreme  Court  had  clearly  defined  the  relations  between 
Federal  and  state  authority,  the  Federal  government  should 
refrain  from  attempting  to  regulate  the  issue  of  securities. 
Too  many  difficult  legal  complications  remained  to  be  cleared 
up. 

There  certainly  should  have  been  a  more  enthusiastic  com- 
mendation of  the  efforts  of  states  like  Massachusetts,  Wisconsin, 
Texas  and  New  York  to  cope  with  their  local  problems  of  finan- 
cial control.^  The  apparent  absence  of  a  due  appreciation  of 
the  importance  of  the  work  of  the  various  public  service  com- 
missions all  over  the  country  may  perhaps  be  accounted  for  on 
the  ground  that  it  lay  outside  the  scope  of  the  work  of  a  purely 
Federal  commission.  Yet  a  word  of  encouragement  to  these 
state  administrations  would  have  done  something  to  offset  the 
rather  negative  character  of  its  conclusions.  Someone  must 
exercise  financial  control.  If  inadvisable  for  the  Federal  govern- 
ment to  undertake  it  at  this  time,  as  might  well  be,  then  it  was 
important  to  emphasize  the  fact  that  the  states  must  do  it  as 
best  they  could.  On  the  other  hand,  the  recommendations  con- 
cerning physical  valuation  as  an  element  in  rate  regulation  were 
sufficiently  progressive  to  impart  an  aspect  of  judicial  balance 
and  general  fairness  to  the  report  as  a  whole. 

Two  specific  conclusions  of  the  securities  commission, 
however,  were  surely  open  to  debate.  One  was  the  contention 
that  little  relation  obtains  between  capitalization  and  rates.  The 
statement  is,  of  course,  largely  true;  but  like  most  generaliza- 
tions of  the  sort  fails  to  state  the  whole  truth.  It  is  probably 
absolutely  true  as  to  particular  rates.  No  one  would  claim  for 
a  moment  that  the  heavily  capitalized  Wabash,  operating  in 
trunk  line  territory  alongside  the  Pennsylvania  system,  could 
charge  any  higher  rates  because  of  its  financial  disabilities. 

'  These  will  bo  fully  described  in  our  second  volume  in  connection  with 
stockwatering,  valuation  and  allied  financial  problems. 


THE   ACT    OF    1910  575 

Rather  the  reverse.  But  while  true  of  particular  rates,  capitali- 
zation does  exert  an  indirect  but  nevertheless  a  very  appreciable 
influence  upon  the  general  level  of  rates.  For  this  point  I 
have  argued  elsewhere  at  some  length.^  Was  it  surprising 
that  the  pressure  for  advanced  rates  in  1910-1911  in  trunk  line 
territory  should  come  from  the  heavily  capitalized  New  York 
Central,  with  substantial  aid  and  comfort  from  the  Erie? 
Was  it  a  mere  coincidence  that  the  Lackawanna  road,  with  its 
stock  quoted  above  $500,  was  a  less  prominent  factor  in  the 
agitation  than  some  of  its  neighbors?  True  enough,  no  direct 
relation  between  rates  and  capitaUzation  exists;  but  that  a 
positive  incentive  to  higher  charges  in  general  may  be  found  in 
the  need  of  supporting  a  large  capitalization  seems  reasonably 
clear  in  the  light  of  experience.  This  point  was  certainly 
neglected  or  glossed  over  in  the  report. 

A  most  debatable  and,  as  I  hold  it,  dangerous  proposition 
in  this  report  was  the  proposed  abolition  of  the  "dollar  mark" 
upon  capital  stock.  However  desirable  it  might  be  for  mining 
companies  and  the  lesser  industrials,  as  in  Germany,  to  do  away 
with  any  stated  par  value  for  share  capital  in  order  to  disabuse 
the  public  mind  of  its  purely  artificial  character,  the  proposition  is 
quite  different  when  applied  to  an  industry  like  a  railroad.  There 
is  all  the  difference  in  fact  between  purely  private  and  competi- 
tive conditions  of  a  more  or  less  speculative  character,  and  those 
under  which  monopoly  privileges  are  conferred  by  gift  of  the 
puljlic.  Space  does  not  permit  a  criticism  of  this  proposition 
in  detail.  I  have  elsewhere  discussed  it  more  at  length.- 
Many  objections  occur  at  once,  none  of  them  mentioned  in  this 
report  which,  almost  jauntily,  as  it  seems,  proposed  to  revolu- 
tionize all  of  our  customary  habits  of  financial  thought.  Among 
these  objections  there  is  the  fact  that  abolition  of  par  value 
removes  the  restraint  upon  the  promoter  or  management,  for 
liability  to  creditors  in  case  of  part-paid  shares.     The  experience 

^  Volume  II,  in  the  chapter  on  Valuation. 

2  Volume  II,  in  the  chapter  on  Capital  Stock. 


576  RAILROADS 

of  the  Asphalt  Company  of  America  is  illuminating  in  this 
regard.  May  we  trust  mere  publicity  to  provide  corresponding 
safeguards  for  honest  promotion  with  this  liability  removed? 
Then  again,  how  about  the  issue  of  stock  in  exchange  for 
property  acquired,  as  had  frequently  occurred  in  the  course  of 
railway  consolidation?  Was  it  immaterial  whether  the  ab- 
sorbing company  put  out  500,000  "participating  shares,"  with 
a  market  value  of  $100  each,  or  t^\^ce  that  number  of  "  certificates 
of'  participation"  commanding  half  that  figure  per  unit  in  ex- 
change for  the  property  acquired?  And  still  further,  there  is 
the  inevitable  effect  upon  speculation.  One  of  the  primary 
needs  of  the  time  was  to  effect  a  separation  of  our  common 
carriers  from  Wall  Street  influence.  Did  it  make  no  difference 
whether  the  Southern  Railway  "participating  shares"  were 
traded  in  around  $25;  or  those  of  the  Louisville  &  Nashville 
commanded  a  price  of  $150?  Low  quotations  always  offer  a 
great  stimulus  to  speculative  manipulation  —  as  any  student  of 
Rock  Island  affairs  must  concede.  To  do  away  with  par,  which 
means  permission  to  emit,  mthout  reproach,  at  any  figure 
"below  par"  —  how  hard  it  is,  indeed,  to  get  rid  of  that  con- 
ception of  some  standard  of  normality  —  could  not  but  exert  a 
malign  influence.  And  then,  finally,  over  and  above  all  other 
considerations  there  was  the  need  of  some  general  standard  of 
comparison  for  all  sorts  of  purposes  —  some  base  from  which  to 
judge  of  normality.  The  proposal  to  wipe  out  all  such  stand- 
ards, with  the  mere  warning  to  public  and  investors  aUke  to 
beware,  seemed  like  a  step  backward. 

This  brings  us  to  the  insistence  of  the  commission  upon  the 
need  of  the  railroads  for  more  capital  for  development;  and  the 
difficulty  of  financing  new  enterprises  under  regulative  provisions 
of  law,  such  as  the  prohibition  of  the  issue  of  shares  at  a  discount. 
Massachusetts  had  recently  passed  through  an  experience  of 
probably  excessive  regulation.  But  simple  modifications  of 
its  anti-stockwatering  laws  seemed  to  have  solved  the  difficulty. 
Of  course  the  developmental  problems  of  the  West  and  South 


THE   ACT    OF    1910  577 

are  quite  different  from  those  of  New  England.  Yet  there  was 
the  experience  of  Texas  to  fall  back  upon.  Complaint  had  been 
made,  of  course,  especially  by  the  Gould  roads,  of  the  insufl&- 
ciency  of  capital  for  new  work.  But  the  growth  of  mileage 
seemed,  nevertheless,  to  compare  not  unfavorably  with  pro- 
gress in  other  states.  Were  the  Gould  roads,  for  example,  any 
better  off  in  other  states  where  greater  liberality  of  laws  prevails? 
The  fact  was  that  much  new  construction  and  improvement 
remained  to  be  done  all  over  the  country,  as  this  report  duly 
emphasized;  but  much  of  it  would  probably  have  to  be  done  by 
companies  akeady  in  the  field.  Not  many  new  steam  railroad 
companies  are  now  needed  even  in  the  West.  It  must  be 
confessed  that  the  recently  authorized  extension  of  the  Grand 
Trunk  Railway  into  the  heart  of  New  England  shows  how  per- 
sistent is  the  demand  for  new  roads  even  in  the  East.  But 
whoever  may  build,  let  them  learn  the  lesson,  so  often  forgotten, 
that  honest  management  and  conservative  financing,  to  the 
end  that  solid  credit  be  first  established,  has  far  more  to  do 
vdih  facilitating  development  than  non-interference  by  law. 
This  was  probably  a  time  when  encouragement  to  the  railroads 
in  a  period  of  stress  should  properly  be  given.  But  let  it 
not  be  forgotten  that  good  faith  to  the  public  and  to  stock- 
holders, together  with  prudent  financing,  must  be  the  primary 
source  of  credit. 

Many  admirable  features  of  this  report  deserve  mention, 
did  space  permit.  The  clear  exposition  of  the  distinction  be- 
tween stocks  and  bonds,  and  especially  the  discussion  of  inter- 
corporate financing,  occupied  a  prominent  place.  The  document 
promised  to  play  a  large  part  in  the  determination  of  govern- 
mental policy  in  future.  It  well  merited  the  most  careful  perusal 
by  legislators,  financiers  and  economists.  In  the  nature  of 
things  so  conservative  a  document  could  never  hope  for  a 
popular  reception.  But  many  of  its  financial  platitudes  were 
probably  in  need  of  reiteration  for  the  good,  both  of  the  carriers 
and  the  public. 

VOL.  1—37 


578  RAILROADS 

The  Hepburn  Act  of  1906,  despite  the  agitation  over  its 
enactment  in  Congress,  ''came  in  like  a  hon  and  went  out  hke 
a  lamb,"  imitating  thereby  the  month  of  March  in  which  its 
crucial  changes  were  effected.  In  the  end  it  proved  to  be  a 
much  less  drastic  measure  than  the  railroads  feared.  This 
Mann-Elkins  law,  four  years  later,  on  the  other  hand,  introduced 
by  the  presidential  bill  as  a  merely  supplementary  piece  of 
legislation,!  "rounding  out  the  Roosevelt  pohcies,"  emerged 
from  Congress  really  radical  in  character.  Every  change  made 
was  "progressive";  and  yet  there  was  little  pubKc  interest 
manifested  on  either  side.  No  publicity  campaign  was  carried 
on  by  the  carriers.  No  extended  discussion  took  place  in  the 
press.  There  were  several  reasons  for  this  contrast.  It  is 
partly  true,  as  one  writer  has  suggested,  that  "the  marrow 
had  already  been  extracted  from  railroad  regulation  as  a  political 
issue;  and  that  it  had  become  merely  a  bone  of  contention  in  a 
factional  strife."  Moreover,  the  fundamental  principle  of 
effective  governmental  regulation  had  been  indisputably  affirmed 
in  1906.  The  Act  of  1910  had  for  its  purpose  a  firmer  intrench- 
ment  of  the  position  already  occupied.  Debate  centred 
largely  upon  uninteresting  technical  questions.  The  broader 
issues  were  relegated  to  second  place.  Even  the  carriers  on 
their  part  were  extremely  reserved  in  stating  their  position. 
It  was  conceded  on  all  sides  that  the  less  public  opinion  in 
general  was  aroused,  the  hghter  would  be  the  sentence  passed 
upon  the  prisoners  at  bar.  It  is  difficult  to  determine  in  how  far 
the  marked  advance  made  in  this  statute  was  due  to  contem- 
porary happenings,  like  the  general  advances  of  freight  rates, 
the  Ilhnois  Central  scandals  and  the  like;  or  to  a  deep-seated 
conviction  on  the  part  of  the  progressive  element  in  Congress. 
But  that  the  law,  as  a  whole,  was  a  surprise  in  the  end  even  to 
its  proponents  is  beyond  doubt. 

A  word  may  be  added  concerning  the  omissions  in  the 

1  Cf.  Senator  La  FoUctte's  characterization  of  it.  Footnote,  p.  559, 
supra. 


THE    ACT    OF    1910  579 

Mann-Elkins  law.  The  most  important  was  the  elimination 
of  the  administration  plan  for  authorizing  agreements  between 
carriers  as  to  rates,  subject  to  supervision  by  the  Commission. 
The  Republican  platform  had  definitely  promised  relief  of  this 
sort  to  the  railroads.  The  Democratic  party  had  somewhat 
equivocally  promised  an  amendment  of  the  law  prohibiting 
poohng  "to  make  it  unlawful,  unless  approved  by  the  Com- 
mission." The  plan,  however,  met  with  persistent  opposition 
on  all  sides,  largely  on  the  ground  that  it  conflicted  with  the 
Sherman  Anti-Trust  law.  Other  details  which  fell  by  the  way 
concerned  proposals  to  extend  jurisdiction  over  water  carriers 
on  inland  waterways.^  Whether  the  Commission  might 
exercise  any  control  over  those  which  formed  parties  to  a 
through  line  still  remained  an  open  question.^  And  then  at  the 
last  there  was  the  omission  of  Congress  to  deal  with  the  question 
of  fixing  minimum  rates  or  differentials  between  rates.  This 
was  responsible,  as  will  shortly  appear,  for  much  of  the  difficulty 
encountered  in  the  apphcation  of  the  long  and  short  haul  clause 
to  the  transcontinental  rate  problem. 

^  The  National  Waterways  Commission  Report  of  1912  urged  this 
strongly.  And  the  attempts  in  connection  with  fixing  the  tolls  for  the 
Panama  Canal  in  the  same  year,  to  prohibit  all  railway  ownership  or 
interest  in  coastwise  steamships,  were  significant  of  legislation  yet  to  come. 
Cf.  pp.  591  and  638,  infra. 

"^  Cf.  the  Goodrich  Transit  Co.  case.     Page  586,  infra. 


CHAPTER  XVIII 

THE  COMMERCE  COURT:    THE  FREIGHT  RATE  ADVANCES 

OF  1910 

The  Commerce  Court  docket,  581.  —  The  Commerce  Court  in  Congress, 
582.  —  Supreme  Court  opinions  concerning  it,  583.  —  Legal  v.  economic 
decisions,  586.  —  Law  points  decided,  586.  —  The  Maximum  (Cincin- 
nati) Freight  Rate  case  revived,  588.  —  Real  conflict  over  economic 
issues,  590.  —  The  Louisville  &  Nashville  case,  590.  —  The  California 
Lemon  case,  592.  —  Broad  v.  narrow  court  review  once  more,  593. 

The  freight  rate  advances  of  1910,  594.  —  Their  causes  examined,  595.  — 
Weakness  of  the  railroad  presentation,  596.  —  Operating  expenses  and 
wages  higher,  597.  —  The  argument  in  rebuttal,  598.  —  "Scientific 
management,"  598.  —  The  Commission  decides  adversely,  599. 

The  three  vital  features  of  the  Mann-Elkins  law  of  1910 
were:  the  creation  of  the  Commerce  Court,  for  the  purpose 
of  expediting  the  judicial  review  of  cases  appealed  from  the 
Interstate  Commerce  Commission;  the  grant  of  power  to 
suspend  rate  advances  pending  examination  as  to  their  reason- 
ableness; and  the  rehabilitation  of  the  long  and  short  haul 
clause.  The  law  was  passed  on  June  18,  1910.  Within  the 
brief  period  of  two  years  it  successfully  emerged  from  a  supreme 
test  respecting  rate  advances;  enough  experience  had  already 
been  had  with  the  new  Commerce  Court  to  warrant  an  opinion 
as  to  its  merits  as  a  special  tribunal  for  the  review  of  transporta- 
tion decisions;  and,  finally,  an  opinion  by  the  Interstate  Com- 
merce Commission  was  rendered,  and  is  at  this  writing  under 
review  by  the  Supreme  Court  of  the  United  States,  in  the  most 
important  case  ever  likely  to  arise  under  the  long  and  short 
haul  clause.  Predictions  were  freely  made  in  1910  that  certain 
shortcomings  in  the  revised  law,  particularly  the  failure  to 
grant  control  over  minimum  rates  and  the  establishment  of 
differentials  between  rates,  would  soon  have  to  be  remedied. 
Experience  promptly  threw  light  upon  these  questions  also. 


THE  COMMERCE  COURT  581 

The  present  is  thus  an  opportune  time  to  review  the  entire 
situation  respecting  Federal  railroad  regulation. 

When  the  Commerce  Court  was  created,  fears  were  enter- 
tained that  there  would  not  be  enough  business  to  employ  its 
time.  This  prediction  was  far  from  being  realized,  judging 
by  the  record  of  the  first  year.^  Including  thirty-six  cases 
transferred  to  it  from  the  various  Federal  circuit  courts,  a 
total  of  fifty-seven  suits  were  placed  upon  its  docket  up  to 
December  20,  1911.  Fifty-four  of  these  cases  directly  con- 
cerned orders  of  the  Interstate  Commerce  Commission,  the 
large  majority  —  forty-four  —  being  suits  brought  by  carriers 
to  set  aside  such  orders.  The  Commission  appealed  to  the 
court  but  once  for  enforcement  of  its  mandates,  the  remaining 
nine  cases  being  appeals  of  shippers  for  relief.  But  a  number 
of  these  suits  were  withdrawn  or  dismissed,  or  else  lay  outside 
the  class  of  what  may  fairly  be  called  contested  cases.  Only 
thirty-eight  of  them  were  in  reality  of  significance  as  throwing 
light  upon  the  function  of  the  court  as  an  appellate  tribunal, 
standing  between  the  Interstate  Commerce  Commission  and 
the  Supreme  Court  of  the  United  States.  Thirty  of  these  were 
disposed  of  up  to  December  20,  1911.  That  the  court  took 
itself  seriously  as  a  check  upon,  rather  than  a  coordinate  body 
with  the  Commission,  was  evidenced  by  the  fact  that  restrain- 
ing orders  or  final  decrees  in  favor  of  the  railroads  and  against 
the  shippers  and  the  Commission  were  issued  in  all  but  three 
really  important  cases  out  of  the  entire  thirty.  And  even  of 
these  three  cases  the  Commerce  Court  held  two  to  be  outside 
its  jurisdiction,  while  in  the  third  the  carriers  had  already 
joined  in  the  view  of  the  Commission,  so  that  there  was  really 
no  contest. 2 

1  Interstate  Commerce  Commission,  Annual  Report  1911,  pp.  53,  57, 
59  and  206. 

2  Since  this  time  a  number  of  decisions  have  been  rendered,  on  the 
whole  more  favorably  to  the  Commission.  Notably  in  the  Willamette 
lumber  case,  for  example,  it  was  fully  upheld:  no.  59,  April  session,  1912; 


582  RAILROADS 

A  bitter  campaign  for  the  abolition  of  the  Commerce  Court, 
as  a  result  of  the  tendency  of  its  decisions,  was  waged  in  Con- 
gress during  the  session  of  1911-1912.  The  House  of  Repre- 
sentatives, in  response  to  popular  feeling,  promptly  passed  a 
bill  abolishing  it  forthwith,  the  vote  standing  120  to  49,  with 
many  Republicans  joining  the  Democrats  in  its  condemnation. 
A  sharp  contest  was  precipitated  in  the  Senate  over  "the  legis- 
lative recall  of  judges,"  as  the  matter  was  not  inaptly  termed. 
The  Administration,  through  the  Attorney-General,  ably  de- 
fended the  imperilled  court.  ^  Evidence  was  adduced  to  show 
that  the  Commission  had  been  sustained  in  a  larger  proportion 
of  cases  than  under  the  old  circuit  court  system;  ^  that  injunc- 
tions had  not  issued  with  greater  freedom  than  formerly  and 
that  none  of  them  turned  upon  questions  of  fact;  and,  finally, 
that  the  Administration  plan  had  been  very  much  more  ex- 
peditious. But  so  far  as  Congress  was  concerned  this  evidence 
seems  not  to  have  been  convincing.  The  Senate  soon  followed 
the  House  of  Representatives,  by  a  vote  of  thirty-six  to  twenty- 
three  defeating  an  amendment  to  the  Legislative,  Executive 
and  Judicial  Appropriation  Bill  that  made  provision  for  further 
maintenance  of  the  court.  So  strong  was  the  feeling  that  only 
by  a  close  vote  was  an  amendment  prevented  which  sought  to 
legislate  the  justices  out  of  office  as  well  as  out  of  the  Com- 
merce Court.  For  without  such  provision,  of  course,  they 
would,  under  the  law  of  1910,  be  reassigned  to  service  in  the 
circuit  courts,  from  which  most  of  them  were  drawn.  The 
final  conference  agreement  between  the  two  houses,  appended 
to  the  appropriation  bill  above  mentioned,  definitely  abolished 

and  also  concerning  southern  rates:  no.  40,  February  session,  1912.  In 
June  several  petitions  were  dismissed  for  lack  of  jurisdiction.  In  the 
Shreveport  case,  notable  as  involving  conflict  of  Federal  and  state  authority, 
the  Commission's  order  was  enjoined  in  June  on  the  ground  of  confiscation 
of  property. 

1  62nd  Cong.,  2nd  sess.,  House  Rep.,  no.  472:  Hearings  on  H.  R.  1907- 
1908  before  the  House  Committee  on  Interstate  Commerce,  March  14, 
1912:  Hearings  on  H.  R.  25596  and  25572,  July-August,  1912,  pp.  1-298. 

2  CJ.  p.  460,  supra. 


THE  COMMERCE  COURT  583 

the  court,  but  followed  the  House  plan  of  reassignment  of  the 
justices  to  duty  in  the  circuit  courts.  This  bill  was  twice 
vetoed  by  the  President;  but  the  second  time,  it  failed  of 
re-passage  in  the  Senate  over  his  veto  by  a  narrow  margin.  In 
the  House  the  popular  view  was  expressed  by  re-passing  the 
aboHtion  measure  by  a  vote  of  149  to  53.  These  details  are 
highly  significant  as  inchcating  the  impatience  of  Congress  ^ith 
any  attempt  at  interference  "^ith  the  positive  program  of 
administrative  control  of  railroads  decreed  in  1906-1910.  The 
fate  of  the  court  then  rested  in  the  hands  of  the  President,  its 
original  sponsor.  A  dehcate  situation,  concerning  the  rela- 
tions between  Congress  and  the  executive  in  the  matter  of 
legislative  "riders"  to  appropriation  bills,  resulted.  WTiether 
such  summary  proceedings  as  those  initiated  by  Congress  were 
warranted  by  the  facts,  depended  upon  the  final  disposition  of 
the  contested  cases  by  the  Supreme  Court,  before  which  tri- 
bunal most  of  them  were  then  pending  on  appeal.  If  it  appeared 
that  the  court  had  in  reality,  as  alleged,  sought  to  usurp  powers 
legitimately  exercised  by  the  Commission,  the  case  for  aboli- 
tion would  be  greatly  strengthened.  But  in  any  event,  the 
certainty  of  a  presidential  veto  of  any  law  affecting  this 
pet  project  of  the  Administration  rendered  the  attack  upon 
the  Commerce  Court  for  the  time  being  abortive.  As  the 
matter  was  finally  left,  Congress  acceded  to  the  President's 
wishes,  continuing  the  appropriation  for  maintenance  of  the 
court  until  March  4,  1913.  What  will  happen  in  the  mean- 
time after  Congress  reassembles,  remains  to  be  seen. 

The  determination  of  the  proper  scope  and  function  of 
judicial  review  was  substantially  forwarded  by  several  deci- 
sions of  the  Supreme  Court  of  the  United  States  in  June,  1912. 
The  general  effect  of  these  was  substantially  to  curtail  the  over- 
weening ambition  of  the  Commerce  Court  as  an  intermediate 
judicial  body.  Following  the  Goodrich  Transit  Company 
opinion^  which  first  reversed  the  Commerce  Court,  all  three  of 
1  Discussed  infra,  p.  586. 


584  RAILROADS 

these  latest  opinions  on  appeal  again  favored  the  Interstate 
Commerce  Commission  as  against  its  judicial  reviewer.  In 
two  instances,  the  assumed  jurisdiction  of  the  new  court  was 
denied;  while  in  the  third,  although  jurisdiction  was  recog- 
nized, its  decision  was  reversed.  Because  of  their  bearing  upon 
subsequent  developments,  a  brief  review  of  these  cases  may 
not  be  out  of  place. 

The  Proctor  and  Gamble  Company,  well-known  soap  manu- 
facturers, had  complained  of  certain  regulations  concerning 
demurrage  upon  their  tank  cars.  The  Commission  upheld 
the  carriers,  affirming  that  their  rules  were  proper  and  lawful. 
The  complainants  thereupon  appealed  to  the  Commerce  Court, 
which  claimed  jurisdiction  to  award  pecuniary  relief,  although 
in  this  instance  it  dechned  so  to  do,  on  the  ground  that  the 
Commission  had  rightfully  decided  the  matter  in  the  first 
instance.  Appeal  then  followed  to  the  Supreme  Court,  with 
the  odd  circumstance  that  the  Commission  and  the  railways 
joined  issue  against  the  shippers.  The  question  was  largely  a 
legal  one,  involving  definition  of  the  jurisdiction  of  the  new 
tribunal.  The  Supreme  Court  in  this  instance,^  —  and,  it 
may  be  added,  in  the  Cincinnati  Freight  Bureau  case,^  which 
similarly  involved  the  relative  powers  of  the  court  and  the 
Commission,  —  unanimously  affnmed  the  right  of  the  Com- 
mission to  decide  such  matters  of  fact  finally. 

To  recognize  the  existence  in  the  court  below  [the  Commerce  Coiirt] 
of  the  power  which  it  deemed  it  possessed,  would  result  in  frustrating 
the  legislative  public  policy  which  led  to  the  adoption  of  the  act. 
The  act  creating  the  Commerce  Court  was  intended  to  be  but  a  part  of 
the  existing  system  for  the  regulation  of  interstate  commerce.  .  .  . 
It  was  not  intended  to  destroy  the  existing  machinery  or  method  of 
regulation,  but  to  cause  it  to  be  more  efficient.  .  .  .  Wholly  irre- 
spective of  the  general  considerations  stated,  we  think  the  conclusion 
of  the  [Commerce]  Court,  as  to  its  possession  of  jurisdiction  over  the 
subject  referred  to,  was  clearly  repugnant  in  other  respects  to  the 
express  terms  of  the  act. 

1  32  Supreme  Court  Rep.,  761. 

2  188  Fed.  Rep.,  242.    At  p.  588,  infra. 


THE  COMMERCE  COURT  585 

Such  a  pronouncement,  folloAnng  the  Kne  of  decisions  headed 
by  the  lUinois  Central  Car  Distribution  case/  must  make  for 
concentration  of  responsibility  and  more  effective  regulation 
in  the  years  to  come. 

The  third  decision  of  the  Supreme  Court,  above  referred  to, 
was  known  as  the  "Restrictive  Rate  case."  ^  Might  railway 
companies  —  the  Baltimore  &  Ohio  and  others  —  charge  a 
different  rate  for  the  carriage  of  coal  to  railways  than  to  other 
shippers,  the  coal  being  intended  for  the  use  of  the  railways  as 
fuel?  In  this  instance  the  Commission  forbade  the  practice. 
Its  order  was  then  promptly  enjoined  by  the  Commerce  Court. 
Jurisdiction  of  the  Commerce  Court  was  conceded  by  the 
Supreme  Court  in  this  instance  also,  but  its  opinion  was  again 
flatly  reversed.  The  issue  at  bottom  was  really  one  of  value 
of  service  as  against  cost  of  service  in  the  determination  of 
reasonable  rates.  Ob\iously  the  cost  of  carr>dng  railway-fuel 
coal  between  two  given  points  is  practically  the  same  as  that 
of  carrying  commercial  coal.  The  Commission,  supported  now 
by  the  Supreme  Court  in  frowning  upon  any  difference  in  the 
charge,  was  thus  according  priority  to  this  consideration  of 
cost.  The  \aew  of  the  Commerce  Court,  which  was  here 
reversed,  tended,  on  the  other  hand,  to  emphasize  such  facts 
as  that  the  tw^o  sorts  of  coal  w^re  intended  for  different  purposes 
and  did  not  come  in  competition  with  one  another  as  to  price. 
In  other  w^ords,  value  of  ser\ace  —  what  the  traffic  would  bear 
—  was  given  greater  weight  than  mere  considerations  of  cost. 
The  Supreme  Court  dechned  to  accept  this  \dew,  preferring 
to  regard  transportation  as  a  matter  of  physical  carriage  of 
goods,  rather  than  to  look  beyond  this  essential  ser\ace  "to 
the  greater  or  less  inducement  to  seek  the  service  "  —  that  is  to 
say,  to  regard  its  commercial  aspects. 

The  last  of  this  batch  of  Supreme  Court  decisions  was 
mainly  a  question  at  law,  namely  the  right  of  the  Commerce 
Court  to  enjoin  the  enforcement  of  an  order  of  the  Commission 
1  P.  538,  supra.  *  32  Supreme  Court  Rep.,  742. 


k 


586 "  RAILROADS 

concerning  certain  allowances  for  lighterage  and  terminal  ser- 
vice on  sugar  in  New  York  harbor.^  The  judicial  poise  of  the 
Supreme  Court  was  here  evidenced  in  its  affirmation  of  the  right 
of  the  Commerce  Court  to  issue  the  injunction.  The  plain  pur- 
pose of  the  law  in  setting  up  this  intermediate  tribunal  as  a  safe- 
guard against  abuse  of  administrative  authority  was  given  effect; 
but  it  was  ordered,  nevertheless,  that  the  case  be  remanded, 
to  be  disposed  of  on  its  merits  before  the  Interstate  Commerce 
Commission,  the  forum  selected  by  Congress  for  that  purpose. 
The  grist  of  cases  appealed  to  the  Commerce  Court  may  prof- 
itably be  divided  for  discussion  into  two  groups,  namely,  those 
which  clearly  concerned  questions  of  law  and  those  in  which 
matters  of  fact,  or  economic  conclusions  based  thereon,  were 
primarily  at  stake.  The  first  group  of  purely  law  cases  need 
detain  us  but  briefly.  There  could  be  little  doubt  about  the 
necessity  of  judicial  review  of  law  findings  of  the  Commission. 
The  best  illustration  is  afforded  by  the  first  decision  of  the 
Commerce  Court  to  be  reviewed  by  the  Supreme  Court  of  the 
United  States. ^  Inland  water  carriers  were  not  placed  under 
the  jurisdiction  of  the  Act  to  Regulate  Commerce  by  the 
Mann-Elkins  amendments  of  1910,  except  in  so  far  as  they  were 
joined  in  control  with  railroads  or  might  enter  into  arrangements 
for  continuous  shipments  with  carriers  by  land.  But  the 
Commission,  having  always  required  railroads  to  file  accounts 
covering  both  their  local  and  interstate  business,  called  upon 
the  carriers  on  the  Great  Lakes  to  render  similar  statements 
as  to  their  entire  traffic,  whether  subject  to  Federal  control  or 
not.  This  the  water  lines  refused  to  do.  The  Commerce 
Court,  in  overruling  the  Commission,  did  not  question  the 
power  of  Congress  to  require  such  accounts,  but  held  that  it 
was  its  intention  to  confine  publicity  to  that  portion  of  the  lake 
traffic  over  which  the  jurisdiction  of  the  Commission  actually 

1  32  Supreme  Court  Rep.,  817. 

2  Goodrich  Transit  Company  v.  I.C.C.;  Commerce  Court,  nos.  21-24, 
April  term,  1911.  Decided  by  the  Supreme  Court,  April  1,  1912;  32 
Supreme  Court  Rep.,  43G;   190  Fed.  Rep.,  943. 


THE  COMMERCE  COURT  587 

extended.  It  thus  appears  that  the  law  point  was  doubly 
important,  inasmuch  as  its  determination  affected  not  alone 
the  enforcement  of  publicity  for  water  lines  but  also  of  all 
carriers  by  land,  so  far  as  their  intrastate  business  was  con- 
cerned. Fortunatel}^  the  Supreme  Court,  in  sustaining  the 
Commission,  held  that  the  Commerce  Court  had  erred  in 
coiifusing  "knowledge"  of  intrastate  business  with  its  "regu- 
lation." As  to  the  former,  the  authority  of  the  Commission 
was  fully  upheld.  This  and  the  important  question  upon 
which  the  entire  Intermountain  rate  controversy  rested,  namely, 
as  to  the  authority  of  the  Commission  to  prescribe  relativity  of 
rates,  ^  were  the  most  important  points  of  law  at  first  raised 
before  the  new  tribunal.  Other  legal  questions  decided  by  the 
Commerce  Court  —  generall}^  in  favor  of  the  railroads,  be  it 
observed  —  were :  whether  reparation  might  be  claimed  for  an 
unreasonable  rate  when  the  burden  had  been  already  passed 
on  to  the  consumer;  ^  whether  the  Nashville  Grain  Exchange 
might  lawfully  intervene  in  proceedings  before  the  Commission 
under  the  liberal  terms  of  the  law  of  1910;  ^  whether  "sepa- 
rately established  rates"  applied  by  a  carrier  to  through  traffic 
when  there  is  a  through  rate  but  no  joint  rate  are  matters  of 
interstate  commerce  or  not;  ^  as  to  the  limitations  by  law  of 
the  right  of  carriers  to  refund  overcharges  to  shippers;  ^  and 
whether  the  Union  Stockyards  Company  was  a  common  carrier 
engaged  in  interstate  commerce,  and  thus  subject  to  control  as 
to  preferential  treatment  of  shippers.^  However  these  cases 
might  be  finally  decided  by  the  court  of  last  resort,  there  could 
be  no  conflict  of  powers  between  the  Commerce  Court  and  the 
Commission  in  regard  to  such  matters  of  law.  The  real  bone 
of  contention  between  the  two  bodies  —  administrative  and 
judicial,  respectively  —  was  the  question  of  their  respective 
powers  outside  the  field  of  law. 

• 

1  Cf.  p.  624,  infra.  *  195  Fed.  Rep.,  968. 

2  193  Fed.  Rep.,  678.  ^  193  Fed.  Rep.,  667. 

3  191  Fed.  Rep.,  37.  •  192  Fed.  Rep.,  330. 


588  RAILROADS 

Before  leaving  the  disputes  over  law  points,  we  may  profit- 
ably consider  one  further  case,  important  because  of  its  bearing 
upon  the  determination  of  reasonable  rates.  This  occurred 
in  1911  through  a  revival  of  the  old  Maximum  (Cincinnati) 
Freight  Rate  case  of  1896.^  It  will  be  recalled  that  this  in- 
volved the  relative  rates  to  southern  centres  from  eastern  and 
middle  western  cities. ^  In  the  original  case  in  1894,  the  Com- 
mission held  that  the  rates  from  Cincinnati  were  too  high  by 
comparison  with  the  rates  from  New  York;  ordering  those  for 
first-class  freight,  for  example,  to  be  reduced  from  seventy-six 
cents  to  sixty  cents  per  hundred  pounds.  The  Supreme  Court 
directed  a  dismissal  of  the  bill  of  complaint,  on  the  ground  that 
the  Commission  had  no  authority  to  establish  rates  for  the 
future.  This  defect  in  the  law  being  remedied  by  the  amend- 
ment of  1906,  the  Commission,  upon  a  new  complaint,  made  a 
second  order  in  1910.  This  differed  from  its  earlier  decision 
in  prescribing  a  reduction  of  the  rate  from  Cincinnati  from 
seventy-six  cents  to  only  seventy  cents,  whereas  the  first 
decision  had  ordered  it  reduced  to  sixty  cents  per  hundred 
pounds.  The  Cincinnati  shippers,  not  content  with  this  re- 
duction, then  promptly  appealed  to  the  Commerce  Court  for 
a  review  of  the  case.  The  proceeding  was  unique,  therefore, 
in  that  the  appeal  to  the  Commerce  Court  was  taken,  not  by 
the  carriers  but  by  shippers  who  complained  that  the  rates 
established  hy  the  Commission  were  too  high.  The  Commerce 
Court  in  sustaining  the  order  of  the  Commission,  therefore, 
in  reality  acted  in  favor  of  the  railroads,  being  thereby  consist- 
ent with  its  general  attitude  of  conservatism.  But  its  right  to 
take  cognizance  of  such  questions  was  denied  by  the  Supreme 
Court.  Thus,  in  all  probability,  this  famous  and  protracted 
litigation  was  brought  to  a  close. 

The  specific  law  point  in  this  Cincinnati  case  was  as  to 
whether  the  reasonableness  of  a  rate  should  be  determined 
in  the  light  solely  of  its  effect  upon  the  particular  carrier  con- 
1  32  Supreme  Court  Rep.,  769.  *  Pp.  248  and  391,  supra. 


THE  COMMERCE  COURT  589 

cerned;  or  whether  the  result  for  other  competing  lines  and  for 
the  entire  territory  served,  should  also  be  taken  into  consider- 
ation. The  Cincinnati  Southern  Railroad  extended  as  a  short 
and  direct  route  336  miles  due  south  to  Chattanooga.  It  was 
neither  expensive  to  construct,  to  maintain  or  to  operate.  It 
was  the  first  in  the  field;  having  been  constructed  by  the  city 
of  Cincinnati  to  reach  the  southern  markets.  It  was  not 
burdened  by  unremunerative  branch  lines.  Its  net  earnings 
amounted  to  over  forty  per  cent,  upon  the  capital  stock. 
Other  competing  railroads  between  the  same  points  were  one- 
third  longer  and  were  other-udse  burdened  by  the  necessity  of 
maintaining  unprofitable  branches.  These  other  roads  could 
not  be  so  economically  operated.  But  they  had  voluntarily 
entered  the  field  in  competition  ajter  this  direct  line  was  con- 
structed, and  they  had  elected  to  continue  therein.  The  rates 
established,  however,  for  the  Cincinnati  Southern,  —  the  short 
line,  —  naturally  fixed  the  rates  at  which  these  others  had  to 
participate  in  the  traffic.  At  the  rate  of  seventy  cents,  pre- 
scribed in  this  second  order  of  the  Commission,  all  the  carriers 
concerned  could  make  a  living.  The  short  line  alone,  pre- 
sumably, could  have  endured  the  rate  of  sixty  cents  as  pre- 
scribed at  first.  Was  it  laA\'ful,  however,  to  decide  a  complaint 
preferred  against  a  particular  most-favored  railroad  by  a  city 
which  built  it  to  attain  a  certain  object,  upon  the  basis  of  the 
effect  of  such  rates,  not  upon  this  road  but  upon  others  subse- 
quently built  and  less  fortunately  situated?  To  do  so  would, 
of  course,  enable  the  most-favored  carrier  to  prosper  exceed- 
ingly; even  more  so  than  it  did  then.  But  these  higher 
rates  would,  most  unfortunately,  thwart  the  very  purpose 
animating  its  construction.  The  Commission,  sustained  by  the 
majority  of  the  Commerce  Court,  adopted  the  latter  view.^ 
A  dissenting  minority,  on  the  other  hand,  presented  strongly  the 
opinion  that  under  such  special  circumstances,  in  the  determi- 

^  Other  cases  similarly  decided  are  as  follows:    9  I.C.C.  Rep.,  382; 
15  Idem,  376  and  555. 


590 


RAILROADS 


nation  as  to  reasonableness,  no  right  existed  for  considering  the 
effect  of  a  rate  upon  other  roads  than  the  particular  one  against 
which  the  complaint  lay.  The  Supreme  Court  in  affirming 
the  sole  authority  of  the  Commission  to  pass  upon  such 
issues,  nevertheless,  left  this  detail  concerning  the  determination 
of  reasonableness  of  rates  for  possible  reargument  in  future. 

Attention  may  be  now  directed  to  the  controversy  as  to 
the  seat  of  authority,  not  over  law  points,  but  concerning 
distinctly  economic  issues.  A  typical  case  before  the  Com- 
merce Court  concerned  rates   from  New   Orleans  to    several 


a 

/ 

/ 

/       \Ki 

p\T 

\       \>^ 

1  ''"NvVi 

0 

h 

^^ 

competing  cities  on  the  line  of  the  Louisville  &  Nashville 
Railroad.^  An  interesting  phase  of  local  discrimination  ap- 
peared. The  accompanying  map  discloses  the  situation. 
Normally  the  through  rate  from  New  Orleans  to  Montgomery 
(the  long-distance  point)  would  be  less  than  the  sum  of  the 

1  195  Fed.  Rep.,  541,  L.  &  N.  R.  R.  v.  I.C.C.  In  this  case  there 
was  no  dispute  as  to  facts,  but  only  as  to  the  conclusion  to  be 
drawn  therefrom.  A  straight  difference  on  points  of  fact  was  raised  in  the 
Pacific  Coast  Switching  cases  (188  Fed.  Rep.,  229).  The  dissenting 
opinion  as  to  usurpation  of  the  rights  of  the  Commission  is  significant. 


THE  COMMERCE  COURT  591 

local  rates  from  New  Orleans  to  Mobile  (the  intermediate 
point)  and  then  from  Mobile  on  to  Montgomery.  This  would 
conform  to  the  general  rule,  which  is  based  on  the  simple  fact 
that  through  rates,  being  competitive,  are  usually  forced  below 
the  level  of  local  charges,  commonly  unaffected  by  such  com- 
petition. In  this  case  the  situation  was  reversed.  Water 
competition  affected  the  local  rates,  both  into  Mobile  from  New 
Orleans  by  sea  on  the  one  side,  and  then  up  the  Alabama  to 
Montgomery  by  river  steamer  on  the  other.  But  such  water 
competition  did  not  apply  to  the  through  rate,  probably 
because  through  shipment  by  water  would  necessitate  a  transfer 
en  route  from  a  gulf  steamer  to  a  river  boat  at  Mobile.  Thus 
in  this  case  it  came  about  that  local  competition  was  keener 
than  the  rivalry  as  to  through  traffic.  The  Louisville  &  Nash- 
ville, nevertheless,  had  secured  the  bulk  of  the  business  to 
Mobile  by  reason  of  the  low  local  rates  by  rail  which  had  been  in 
effect  for  many  years,  even  after  practical  elimination  of  the 
water  lines.  The  situation  was  certainly  anomalous,  from 
the  viewpoint  of  cost  of  service  by  rail  alone ;  in  that  the  freight 
rate  was  higher  on  goods  sent  to  Montgomery  direct  than  when 
shipped  on  a  combination  of  local  rates  on  Mobile.  This 
situation,  it  is  apparent,  enabled  Mobile  jobbers  to  buy  goods 
in  New  Orleans  and  actually  lay  them  down  in  Montgomery 
for  less  than  the  freight  charges  to  the  Montgomery  deal- 
ers who  were  on  the  spot.  The  same  situation  prevailed  at 
Pensacola. 

The  immediate  cause  of  dispute  was  the  promulgation  by 
the  Conmiission  in  1907,  under  the  new  powers  conferred  by 
the  Hepburn  Act,  of  a  rule  that  through  rates  must  not  exceed 
the  combination  of  locals  between  the  same  points.  To  com- 
ply with  this  rule,  the  Louisville  &  Nashville,  in  this  instance, 
faced  the  alternative  either  of  reducing  the  through  rate  from 
New  Orleans  to  Montgomery  to  the  sum  of  its  local  charges 
or  else  of  raising  one  or  both  of  the  latter.  The  railroad  nat- 
urally chose  the  latter  course  —  now  enabled  to  do  so  ^\ith 


592  RAILROADS 

safety  as  the  boat  lines  had  long  since  been  put  out  of  business. 
It  advanced  its  local  rates  from  New  Orleans  to  Mobile  suffi- 
ciently to  make  the  new  combination  of  local  charges  equal  the 
through  rate  to  Montgomery,  The  Commission,  on  complaint 
of  Montgomery,  suspended  this  advance,  —  seeking  to  compel 
the  railroad  to  even  things  up,  not  by  advance  of  the  local 
charges  but  by  a  reduction  of  the  through  rate.  This,  it  is 
obvious,  would  relieve  Montgomery  of  the  discrimination  as 
against  Mobile  of  which  it  complained.  As  to  none  of  the  facts 
above  outlined,  was  there  dispute  between  the  court  and  the 
Commission.  The  controversy  turned  solely  upon  which  of 
the  two  remedies  should  be  chosen  to  meet  the  situation.  Were 
the  through  rates  unreasonably  high?  This  was  the  Commis- 
sion's contention.  If  so,  equalization  should  be  attained  by 
their  reduction.  Or,  on  the  other  hand,  were  the  local  rates 
unreasonably  low?  If  so,  they  might  be  evened  upward  with 
propriety.  This  was  the  contention  of  the  Commerce  Court, 
leading  it  to  set  aside  the  order  of  the  Commission.  Which 
was  the  body  competent  to  pass  upon  such  an  issue?  The 
Supreme  Court  had  to  be  called  upon  to  decide.  And  in  the 
meantime  there  was  the  same  old  story  of  delay,  while  irrep- 
arable loss  to  shippers  went  on. 

In  another  instance, — the  California  lemon  case,  —  ^  the 
issue  was  even  more  sharply  drawn  between  the  Commission 
and  the  Commerce  Court.  The  latter,  it  was  averred,  not  even 
content  to  draw  its  own  conclusions  in  matters  of  fact,  had 
made  an  "attempt  to  look  into  the  mind  of  the  Commission 
for  the  purpose  of  ascertaining  the  reasons  on  which  its  order 
was  based."  The  case  dated  from  1909,  when  the  blanket 
rate  from  the  entire  territory  east  of  the  Rocky  mountains  was 
advanced  by  the  railroads  from  $1.00  to  $1.15.  This  action 
followed  the  imposition  of  a  high  protective  duty  on  lemons 
in  the  Payne-Aldrich  tariff.  After  careful  investigation  the 
Commission,  reviewing  the  whole  matter  of  rates  upon  citrus 
1  190  Fed.  Rep.,  591.     Second  opinion  in  22  I.C.C.  Rep.,  149. 


THE  COMIVIERCE  COURT  593 

fruits,  ordered  the  lemon  rate  to  be  reduced  once  more  to  $1.00. 
Appeal  was  promptly  taken  to  the  Commerce  Court,  which 
set  aside  the  order  as  beyond  the  scope  of  authority  delegated 
by  Congress.  The  court  held  that  the  Commission  had  sought 
so  to  adjust  rates  as  to  afford  protection  to  the  California 
lemon  industry  against  foreign  competition,  especially  from 
the  growers  in  Sicily ;  in  place  of  confining  its  attention  to  the 
"intrinsic  reasonableness"  of  the  transportation  charge.  The 
gage  thus  thrown  down  was  promptly  taken  up  by  the  Com- 
mission in  a  second  opinion,  rendered  within  two  months  of 
the  injunction  granted  by  the  Commerce  Court.  Tnis  time  it 
exhaustively  considered  all  phases  of  the  cost  and  manner  of 
transportation  for  oranges  and  lemons  and  re-affirmed  its 
opinion  that  the  rate  of  one  dollar  per  hundred  pounds  was 
reasonable.  At  this  writing  the  matter  rests  there.  What  the 
Commerce  Court  will  do,  remains  to  be  seen.  The  case,  as 
re-stated  by  the  Commission,  is  masterly  in  its  discussion  of 
the  responsibilities  laid  upon  it  by  the  law.  "Is  the  country 
to  be  treated  as  a  whole  for  commercial  purposes,  or  shall  it 
be  infinitely  divided?" 

The  Intermountain  Rate  cases,  discussed  in  the  next 
chapter  as  a  phase  of  the  long  and  short  haul  question,  illus- 
trate even  more  clearly  these  conflicts  between  the  court  and 
the  Commission  on  matters  of  economics.  But  they  intro- 
duced no  new  legal  technicalities.  They  merely  emphasized 
the  critical  nature  of  the  controversy,  so  far  as  it  concerned 
the  larger  constitutional  question  of  separation  of  powers 
between  the  three  main  branches  of  our  government. 

The  situation,  as  revealed  by  these  typical  cases,  reduced 
itself,  in  brief,  to  this:  it  was  the  same  old  question  of  broad 
versus  narrow  court  review  all  over  again.  The  Commerce 
Court  held  it  to  be  its  proper  function,  as  a  court  of  law,  to 
re\'iew  in  the  broadest  way  all  cases  which  came  before  it  on 
appeal.  The  Commission,  on  the  other  hand,  maintained  that 
not  only  all  matters  of  fact,  but  all  inferences  as  to  economic 

VOL.  I — 38 


594  RAILROADS 

facts,  of  necessity  lay  solely  within  the  range  of  its  own  authority. 
And  it  was  certainly  true  that,  without  some  such  hmitation 
upon  the  right  of  review,  the  Commission  might  about  as  well 
have  retired  from  the  field  of  regulation  entirely,  and  contented 
itself  -with  enforcing  the  safety  appliance  laws,  collecting  sta- 
tistics and  ser\dng  as  a  general  publicity  office. ^  Fortunately 
the  situation  promised  to  be  saved  by  the  line  of  Supreme 
Court  decisions  flowing  from  the  Illinois  Central  case.^  The 
making  of  a  rate  for  the  future  being  a  legislative  and  not  a 
judicial  function,  the  power  to  determine  that  a  particular 
rate  was  or  was  not  reasonable  for  the  future,  or  that  a  partic- 
ular discrimination  was  or  was  not  undue,  was  a  discretionary 
legislative  power  which  could  not  be  reviewed  by  the  judiciary. 
If  the  Supreme  Court  in  due  time  applied  this  reasoning  to 
these  later  cases,  the  Commerce  Court  might  confidently  be 
expected  to  take  its  proper  place  m  the  Federal  scheme  of 
things.  Until  it  was  forced  to  do  so,  much  of  the  railroad 
legislation  of  recent  years  would  fail  to  ensure  that  full  measure 
of  certainty  and  promptitude  of  relief  to  which  the  country 
was  entitled,  and  which  it  was  bound  to  have. 

The  decision  of  the  Interstate  Commerce  Commission  in 
1910  in  the  matter  of  freight  rate  advances  ^  was  of  prime  im- 
portance; not  alone  because  of  the  great  monetary  and  com- 
mercial interests  involved,  but  also  because  it  might  afford  a 
forecast  of  the  policy  of  the  government  in  such  matters  in 
future.  Public  interest  was  quickened  also  because  of  the 
novelty  of  resting  the  burden  of  proof  upon  the  railroads  rather 

^  Precisely  like  the  situation  following  the  earlier  emasculation  of  the 
law.     P.  473,  supra. 

2  215  U.  S.,  452.     P.  538,  supra. 

^  61st  Cong.,  3rd  sess.,  Senate  doc,  p.  725,  1911,  10  vols.  Ad- 
mirably summarized  in  American  Economic  Review,  I,  1911,  pp.  766-789. 
Yale  Review,  1910,  pp.  268-288.  Haines  Problems  in  Railway  Regulation, 
1911,  pp.  143-154;  and  files  of  the  Railway  Age  Gazette,  especially  1910, 
p.  1108.  H.  A.  Bullock  in  Boston  Transcript,  Nov.  12,  19,  and  21,  1910, 
offers  suggestive  comment. 


RATE  ADVANCES  OF   1910  595 

than  upon  the  shippers,  as  in  the  past.  The  effect  of  this 
change  in  procedure  was  apparent  throughout.  The  repre- 
sentatives of  the  shippers  were,  in  most  cases,  content  to  point 
out  the  inadequacy  of  the  reasons  advanced  by  the  carriers. 
The  railroads,  on  the  other  hand,  were  forced  to  come  forward 
aggressively  vnth  positive  arguments  favoring  their  side  of 
the  case.  The  only  exception  to  the  negative  task  of  appearing 
in  rebuttal  against  the  carriers'  arguments  was  in  the  some- 
what spectacular  presentation  of  the  novel  issue  of  ''scientific 
management,"  shortly  to  be  discussed. 

The  movement  of  freight  rates  since  1900  was  insistently 
upward.  On  two  separate  occasions  prior  to  1910,  as  we 
have  seen,^  general  advances  by  concerted  action  of  the  carriers 
took  place,  namely  in  1903  and  1907.  These  earlier  changes  had 
been  mainly  confined  to  commodity  rates.  All  the  great  staples, 
such  as  iron  and  steel,  grain,  coal  and  coke,  glass,  brick  and 
cement,  were  affected.  The  rate  increases  of  1910,  on  the 
other  hand,  which  gave  rise  to  the  first  important  test  of  the 
Mann-Elkins  law,  were  mainly  confined  to  advances  in  class 
rates,  —  that  is  to  say,"  the  rates  upon  merchandise  and  the 
better  grades  of  freight.  It  was  doubtless  true,  as  alleged, 
that  the  steady  decline  throughout  a  generation  before  1900 
had  unduly  depressed  the  scale  of  charges  for  transportation 
service;  and  that  prices  in  general,  and  especially  wages  and 
costs  of  operation,  had  greatly  enhanced  since  that  time.  To 
meet  this  situation,  the  carriers  had  proceeded  either  to  get 
together  by  an  understanding  not  to  compete;  or  else  they  had 
permanently  put  an  end  to  competition  by  do-RTiright  consoli- 
dation. After  the  first  upward  movement  which  paused  about 
1904,  some  time  elapsed  without  further  efforts  in  this  direction. 
Then,  after  postponement  of  a  concerted  attempt  in  1908 
matters  went  on  quietly  enough  until  1910.  Many  changes 
were  unostentatiously  made  in  individual  instances  by  modi- 
fication of  traffic  rules  or  classification;  ^  but  no  widespread 
1  Pp.  411  and  488,  supra.  2  p.  427,  supra. 


596  RAILROADS 

action  took  place.  The  occasion  for  the  renewal  of  the  upward 
movement  in  1910  was  an  insistent  demand  of  railroad  em- 
ployees all  over  the  comitry  for  a  rise  in  wages.  And  the 
acquiescent  attitude  of  the  railroad  managers  toward  their 
employees,  suggested  a  tacit  understanding  that  wages  were 
to  be  raised  on  condition  that  the  brotherhoods  support  the 
movement  to  recover  this  advance  from  the  public  through  an 
increase  in  freight  rates. 

The  trunk  lines  filed  their  new  tariffs  in  1910,  even  while 
Congress  was  in  the  throes  of  debate  over  the  Mann-Elkins 
Act.  These  schedules  substantially  increased  all  class  rates,  — 
by  from  eight  to  twenty  per  cent  — ;  and  affected  about  half 
the  commodity  rates,  mainly  of  the  lesser  sort.  The  western 
railroads  promptly  followed  suit,  filing  higher  tariffs  by  about 
ten  per  cent,  for  approximately  200  commodities.  In  response 
to  vehement  protest  from  all  over  the  country.  Congress, 
as  we  have  seen,i  promptly  conferred  authority  upon  the 
Interstate  Commerce  Commission  by  the  Mann-Elkins  amend- 
ments to  suspend  such  rate  advances  temporarily  for  examina- 
tion as  to  their  reasonableness.  By  virtue  of  this  authority 
the  Commission  took  testimony  for  several  months  and  rend- 
ered its  decisions  both  for  the  eastern  and  western  railroads  on 
February  22,  1911.-  The  strongest  impression  which  one 
gains  from  examination  of  the  testimony,  is  that  the  case  for 
the  railroads  was  imperfectly  organized  and  inadequately  pre- 
sented. There  was  no  division  of  the  field  in  argument,  with 
intensive  cultivation  in  each  case;  but  all  of  the  railway  repre- 
sentatives traversed  much  of  the  same  ground,  so  widely  scat- 
tering their  effort  that  but  superficial  treatment  of  each  point 
was  possible.  The  shippers,  on  the  other  hand,  evidently  laid 
out  their  plan  of  campaign  with  more  system  and  had  corre- 
spondingly better  results. 

The  railroads  in  the  presentation  of  their  case  were  some- 
what embarrassed  by  several  complications,  some  applicable 
1  P.  561,  supra.  ^  20  I.C.C.  Rep.,  243  and  307. 


RATE  ADVANCES  OF  1910  597 

to  all  the  roads  alike,  while  others  arose  from  the  diversity  of 
financial  and  operating  conditions  on  different  lines.  All 
ahke  were  denied  resort  to  the  main  argument  advanced  in 
favor  of  the  general  rate  advances  in  earlier  years,  particularly 
in  1900.  It  had  been  expected  that  stress  might  be  laid  upon 
the  increased  cost  of  materials  used  in  construction  or  opera- 
tion; but  the  fact  that,  largely  as  an  aftermath  of  industrial 
depression,  prices  of  many  commodities  were  actually  lower 
in  1910  than  they  had  been  on  the  average  for  a  decade,  de- 
prived the  railroads  of  this  powerful  argument.  The  main 
exceptions  in  this  respect  were  in  the  prices  of  fuel  and  lumber. 
Owing  to  the  diversity  of  operating  conditions  among  the 
carriers,  difficulty  was  also  experienced  in  adducing  the  wage 
increases  of  1910  as  a  warrant  for  advancing  freight  rates. 
Considering  the  entire  railroad  net  affected,  it  appeared  that 
the  augmentation  in  revenue  from  the  proposed  advances 
would  be  $27,000,000;  whereas  the  already  conceded  wage 
increases  were  in  excess  of  $34,000,000,  —  m  each  case  calcu- 
lations being  based  upon  the  same  volume  of  traffic  and  em- 
ployment as  in  the  preceding  year.  The  wage  argument, 
generally  applied,  was  thus  valid.  But  taking  the  carriers 
one  by  one,  it  appeared  that  the  changes  in  wages  and  revenue 
which  might  result,  varied  greatly.  On  the  New  York  Central, 
the  increase  in  revenue  would  just  about  cover  the  rise  in  wages; 
on  the  Pennsylvania,  it  was  less  than  half  of  the  enlarged  pay- 
roll. It  was  thus  apparent  that  emphasis  upon  the  increase 
in  wages  would  not  be  equally  valid  for  argument  by  all  roads 
alike.  The  possible  advantage  of  a  united  front  was  thereby 
denied. 

Broader  ground  for  rate  increases  was  taken  by  the  carriers, 
in  the  argument  that  operating  expenses  had  greatly  augmented 
in  recent  years,  not  so  much  because  of  higher  prices  or  even 
wages,  but  because  of  the  exactions  of  the  public  in  the  way 
either  of  better  facilities  and  service  or  of  greater  safety.  It 
was  alleged  that  vast  expenditures  had  been  necessarily  made 


598  RAILROADS 

for  such  purposes  without  a  commensurate  increase  in  revenue.^ 
The  main  proof  of  this  point  lay  in  statistical  presentation  of 
the  greatly  increased  operating  ratio  within  recent  years; 
that  is  to  say,  the  higher  percentage  of  gross  revenue  which  it 
was  necessary  to  expend  in  operation.  Here  again,  the  carriers 
failed  to  agree  in  the  particular  margin  of  safety  above  a 
reasonable  return  upon  the  investment,  paid  in  dividends, 
which  should  be  put  back  into  the  property.  It  was  also  urged 
by  the  carriers  that  the  necessary  funds  for  constructive  develop- 
ment in  future  could  be  obtained  only  by  such  improvement 
in  railroad  credit  as  would  result  from  a  substantial  margin 
of  net  earnings  above  reasonable  dividends.  Such  were,  in 
the  main,  the  arguments  presented  by  the  railroads  on  behalf 
of  their  plea  that  the  proposed  rate  advances  should  not  be 
suspended. 

The  case  in  rebuttal,  as  presented  by  representatives  of 
commercial  organizations,  was  carried  aggressively  into  the 
enemy's  territory  in  only  one  line  of  argument.  It  was  alleged 
that  sufficient  economy  in  operation  could  be  effected  by  means 
of  "scientific  management"  to  more  than  offset  the  increase  in 
wages  together  with  the  general  demand  for  better  service  and 
improvements  by  the  pubfic.^  On  the  whole  the  arraignment 
of  the  carriers  in  this  regard  failed  to  establish  its  point.  What- 
ever results  from  "efficiency"  had  been  obtained  in  manu- 
facturing establishments,  the  limited  experience  in  railroading 
outside  of  shop  management,  while  generally  satisfactory, 
had  not  been  altogether  convincing.  Essential  differences 
between  railroads  and  factories,  particularly  m  respect  of 
minute  supervision  of  labor  scattered  over  hundreds  of 
miles  of  line,  tended  to  render  impracticable  many  of  the  im- 
provements in  process  advocated  by  efficiency  engineers.     The 

1  This  point  has  since  been  well  presented  in  Suffern,  Railroad  Operating 
Cost,  New  York,  1911.     Cf.  chap.  II,  supra. 

2  This  argument  is  critically  examined  in  the  Quarterly  Journal  of 
Economics,  XXV,  1911,  pp.  539-562.  Cf.  Railway  Age  Gazette.  1912. 
p.  287. 


RATE  ADVANCES  OF   1910  599 

demands  incident  to  the  operation  of  public-service  companies 
are  also  different  from  those  applicable  in  private  business. 
Railroads  must  consider  not  only  profit-making,  but  adequate 
and  satisfactory  service.  And,  finally,  the  thorough  organiza- 
tion of  labor  among  carriers  was  a  bar  to  the  untrammelled 
introduction  of  new  methods.  Nevertheless,  the  publicity 
which  was  derived  from  the  presentation  of  this  case  before 
the  Commission  could  not  fail  to  draw  attention  to  the  need 
of  determined  and  general  application  of  such  sound  and 
businesslike  methods  as  were  found  practicable. 

The  shippers  attempted,  in  general,  to  meet  the  railway 
arguments  point  by  point.  Thus  the  plea  of  steadily  in- 
creasing operating  ratios  absorbing  an  ever  larger  proportion 
of  gross  earnings,  was  met  by  statistical  evidence  showing  that 
gross  revenues  had  so  rapidly  augmented  during  the  decade  as, 
nevertheless,  to  permit  of  a  steady  increase  in  net  revenue 
year  by  year.  In  this  regard,  the  time  was  certainly  opportune 
for  establishing  this  point.  Recovery  from  the  depression 
following  1907  was  actively  under  way  during  1909-1910. 
Not  even  the  indications  that  a  less  rosy  future  was  to  ensue 
in  1911,  —  judged  by  the  then  course  of  net  earnings,  —  sufficed 
to  offset  statistical  evidence  in  this  regard.  Even  if  for  all  the 
roads  taken  together  the  wage  increases  would  more  than 
absorb  the  increasing  revenues,  the  fiscal  year  1910  had  pro- 
duced so  large  an  increase  in  net  earnings,  —  $55,000,000,  — 
as  to  still  leave  the  carriers  better  off  than  they  were  before, 
even  without  the  increased  freight  rates  for  which  they  were 
asking.^ 

The  decisions  of  the  Commission  in  both  cases,  covering 
advances  east  and  west,  was  unanimously  against  the  rail- 
roads.2  It  was  held  that  the  carriers  had  failed  to  prove  their 
case  at  practically  every  point.     While  it  was  true  that  cost 

1  Data  as  to  gross  and  net  earnings  at  this  time  by  comparison  with 
former  years  will  be  found  at  p.  79,  supra. 

2  20  I.C.C.  Rep.,  243  and  307. 


600  RAILROADS 

of  operation  had  increased  for  various  reasons,  it  was  also 
plain  that  the  growth  of  the  business  had  more  than  absorbed 
these  additional  outlays.  And  as  to  the  contention  that  a  fair 
return  upon  the  value  of  the  property  was  not  being  earned, 
the  entire  field  of  argument  concerning  the  reasonableness  of 
railroad  rates  as  related  to  investment,  was  necessarily  held  in 
abeyance  pending  more  positive  data  than  was  then  at  hand. 
The  decisions,  however,  contained  a  ray  of  hope  for  the  carriers 
in  the  promise  that  while  this  general  increase  would  not  be 
upheld,  particular  changes  in  future  would  be  considered  on 
their  merits  in  each  case.^  The  railroads  accepted  the  decision 
as  final,  and  withdrew  the  proposed  tariffs  with  surprisingly 
little  protest.^  Wliether  the  great  increase  in  prices  in  1912 
over  preceding  years,  operating  indirectly  through  uisistent  pres- 
sure for  wage  increases  to  enhance  costs  of  operation,  will 
necessitate  a  reopening  of  this  issue  in  a  large  way,  seems 
likely  to  depend  upon  the  rate  at  which  the  volmne  of  traffic 
augments  in  the  immediate  future.  It  is  clear,  in  any  event, 
that  a  sufficient  surplus  earning  power  must  be  permitted  to 
insure  a  continuance  in  favor  of  railway  securities  as  compared 
with  other  forms  of  investment. 

1  Cf.  Railway  Age  Gazette,  LIV,  1912,  pp.  10-14,  and  803.  A  pecul- 
iarly suggestive  instance  is  the  allowance  of  increases  on  soft  coal.  Not 
a  mere  motive,  —  the  need  of  more  revenue,  —  but  proof  of  reasonable- 
ness in  detail  was  offered  in  evidence.     23  I.C.C.  Rep.,  617. 


CHAPTER  XIX 

THE  LONG  AND  SHORT   HAUL   CLAUSE: 
TRANSCONTINENTAL   RATES 

"Substantially  similar  circumstances  and  conditions"  stricken  out  in 
1910,  601.  —  Debate  and  probable  intention  of  Congress,  602.  —  Con- 
stitutionality of  procedure,  603.  —  Nature  of  applications  for  exemp- 
tion, 604.  —  Market  and  water  competition,  605. 

The  Intermountain  Rate  cases,  610.  —  The  grievances  examined,  611. — 
The  "blanket  rate"  sj^stem,  611.  —  Its  causes  analyzed,  612. — 
Previous  decisions  compared,  615.  —  Graduated  rates  proposed  by  the 
Commission,  616.  —  The  Commerce  Court  review,  620.  —  Water  v. 
commercial  competition  again,  620.  —  Absolute  v.  relative  reasonable- 
ness, 622.  —  Legal  technicalities,  625.  — •  Minimum  v.  relative  rates, 
624.  —  Constitutionahty  of  minimum  rates,  625. 

The  original  long  and  short  haul  clause,  as  we  have  seen, 
forbade  a  greater  charge  for  a  short  than  for  a  long  distance  over 
the  same  line  under  "substantially  similar  circumstances  and 
conditions."  The  principal  amendment  in  1910  was  the  elimi- 
nation of  this  troublesome  clause,  "substantially  similar  cir- 
cumstances and  conditions";  —  responsible,  as  experience  had 
shown  for  the  practical  nullification  of  the  entire  fourth  section 
of  the  law  of  1887  through  the  interpretation  placed  upon  it 
in  1896  by  the  courts.^  The  insertion  of  a  new  provision  in 
1910  prohibiting  carriers  from  charging  "any  greater  compensa- 
tion as  a  through  route  than  the  aggregate  of  the  intermediate 
rates,"  concerned  a  somewhat  different  question,  and  may  be 
omitted  from  consideration  in  this  connection.  The  Commis- 
sion was  given  authority  under  the  amended  law  to  relieve 
carriers  from  the  prohibition  of  the  statute,  which,  in  this 
regard,  did  not  become  effective  until  February  17,  1911.  It 
was  uncertain  at  the  time  how  extensive  was  the  violation  of  the 
distance  principle;   although  a  comprehensive  investigation  by 

^  The  history  of  the  clause  will  be  found  at  pp.  473  and  564,  supra. 


602  RAILROADS 

the  Elkins  Committee  in  1905^  showed  the  existence  of  many 
irregular  tariffs  all  over  the  country.  Within  the  first  ten 
months  after  the  law  took  effect,  5723  applications  for  relief 
under  this  section  were  filed.  Of  this  number  only  two  hundred 
and  ninety  concerned  passenger  fares :  making  it  clear  that  the 
problem  was  mainly  one  of  adjustment  of  freight  rates.  Inas- 
much as  the  Commission  held  that  each  application  should  be 
treated  as  a  formal  complaint  to  be  separately  passed  upon,  it 
will  be  seen  that  these  applications  for  relief  considerably  out- 
numbered the  total  of  4570  formal  complaints  which  had  other- 
wise been  filed  since  1887.  Amendment  of  the  fourth  section 
obviously  imposed  a  heavy  additional  burden  upon  this  ad- 
ministrative arm  of  the  Federal  government. 

The  proposition  to  amend  the  long  and  short  haul  clause 
in  1910  called  forth  the  same  divergence  of  opinion  in  Congress 
as  to  regulation  which  characterized  the  original  debate  twenty 
years  before.  One  party  wanted  an  absolute  long  and  short 
haul  clause,  permitting  of  no  departure  from  the  distance  prin- 
ciple. The  other  stood  for  a  more  elastic  plan,  whereby  carriers 
under  certain  economic  justification  should  be  allowed  to  make 
a  higher  charge  at  the  intermediate  point.  The  prime  difficulty 
lay  in  defining  these  exceptional  cases.  Had  Congress  left 
this  solely  to  the  discretion  of  the  Commission  without  such 
definition,  the  law  might  be  held  unconstitutional,  as  involving 
a  complete  delegation  of  legislative  power.  The  situation  was 
clearly  stated  at  the  time  by  the  Chairman  of  the  House  Com- 
mittee on  Interstate  Commerce.  "Practically  what  we  do  here 
is  to  give  the  Commission  power  to  say  what,  in  a  particular 
case,  shall  be  a  just  and  reasonable  rate;  although  we  declare 
as  a  general  proposition  that  it  shall  be  unjust  and  unreasonable 
to  charge  more  for  a  short  haul  than  for  a  long  haul."  In  brief, 
it  is  clear  that  Congress  intended  that  the  general  language  of 

^  Digest  of  the  Hearings,  Appendix  III,  Dec.  15,  1905,  pp.  1-244. 
An  excellent  body  of  unworked  economic  data  on  rate  making  is  here 
afforded. 


LONG  AND  SHORT  HAUL  CLAUSE  603 

the  statute  should  furnish  the  rule  which  the  Commission  was 
to  adopt  in  applying  this  section  of  the  law. 

Was  there  any  further  intention  of  Congress  in  thus  amend- 
ing the  long  and  short  haul  clause?  The  carriers  contended 
that  the  only  effect  was  to  deny  the  railways  the  right  to  decide 
for  themselves  whether  they  might  disregard  the  rule  of  the 
section:  in  other  words,  that  they  must  conform  to  the  inter- 
pretation laid  down  by  the  Commission  itself  in  the  Georgia 
Railroad  Commission  cases  in  1892.  ^  The  Commission,  on  the 
other  hand,  at  once  interpreted  the  amendment,  as  definmg  the 
purpose  of  Congress  differently.  It  held  that  the  railroads 
must  assume  the  burden  of  justification.  The  carriers,  there- 
fore, must  become  the  advancing  party  in  proving  that  viola- 
tion of  the  distance  principle  was  warranted  by  the  necessities 
of  the  case.  It  is  obvious  that,  without  this  interpretation 
placed  upon  the  amendment.  Congress  would  not  be  providing 
a  remedy  for  local  discrimination,  but  would  be  merely  givmg 
power  to  declare  the  existence  of  a  wrong. 

The  constitutionality  of  the  amended  section  seemed  likely 
to  depend  upon  the  manner  in  which  it  was  applied  adminis- 
tratively. If  construed  as  conferring  unrestricted  power  to 
grant  or  deny  applications  for  relief,  it  would  probably  be  held 
void,  as  already  observed,  as  an  unfettered  delegation  of 
legislative  authority.  Rate  making  being  a  legislative 
function,  this  attribute  of  the  Congress  could  not  con- 
stitutionally be  vested  in  entirety  in  an  administrative 
body.  The  Commission  must,  in  other  words,  be  restricted 
and  guided  by  certain  rules  and  standards  set  by  the  legis- 
lature. This  point  had  been  well  established  respecting  the 
exercise  of  control  over  the  issue  of  capital  stock  by  railroads 
by  the  state  commissions.  It  was  clear,  also,  that  the  long  and 
short  haul  clause  did  not  impose  an  inviolable  rule  to  be  enforced 
against  all  carriers.  This  had  been  the  contention  of  com- 
plainants against  the  railroads  in  the  Spokane  case,  soon  to  be 

^  P.  240,  supra. 


604  RAILROADS 

considered.  It  seemed  clear  that  the  proper  function  of  the  Com- 
mission under  the  law,  was  to  investigate  each  case  by  itself  in 
the  light  of  the  first  three  sections  of  the  Act  in  general.  After 
such  investigation,  if  it  appeared  that  a  departure  from  the  dis- 
tance principle  would  result  neither  in  unreasonable  rates  nor 
in  undue  discrimination,  permission  therefore  must  be  granted. 
Under  such  circumstances  it  could  not  lawfully  be  withheld. 
And  in  the  contrary  case  deviation  from  the  long  and  short 
haul  principle  must  likewise  be  refused. 

The  Commission  in  enforcing  the  new  long  and  short  haul 
clause,  in  the  first  place  laid  down  certain  general  rules  for  its 
own  guidance.^  Perhaps  the  most  important  of  these  was  that 
the  different  rates  or  fares  to  be  compared,  must  apply  to  the 
same  classes  of  transportation.  It  would  be  obviously  unjust 
to  compare  a  one-way  fare  with  either  excursion  or  commuta- 
tion rates.  Export  and  import  freight  rates,  usually  lower 
than  regular  domestic  rates,  must  each  be  dealt  with  in  a  class 
by  themselves,  in  determining  whether  the  more  distant  point 
by  having  a  higher  rate  prejudiced  the  rights  of  intermediate 
ones.  Congress  certainly  did  not  intend  to  make  the  charging 
of  a  commodity  or  carload  rate  in  transcontinental  traffic  un- 
lawful, merely  because  it  happened  to  be  lower  than  local  rates 
or  less-than-carload  classified  shipments  from  intermediate 
points.  Violation  of  the  distance  principle  must  properly 
always  be  determined  by  comparison  between  rates  of  the  same 
kind.  A  number  of  similar  rules  were  promulgated  for  the  sake 
of  duly  standardizing  practice. 

Applications  from  the  carriers  for  exemption  from  the  long 
and  short  haul  clause  in  freight  tariffs  fell  into  four  distinct 
groups.  The  largest  number  of  petitions,  —  more  than  one- 
fourth  of  the  total  filed,  —  had  to  do  with  the  necessities  of 
circuitous  lines  in  meeting,  through  rates  made  over  more 
direct  routes.^     In  such  cases  the  lowest  through  rate  was  often 

1  25th  Ann.  Rep.  I.C.C,  1911,  discusses  the  matter  fully. 

2  CJ.  p.  255,  supra,  as  to  which  Une  makes  the  rate. 


LONG  AND  SHORT  HAUL  CLAUSE  605 

made  by  the  longer  line,  which  might,  at  the  same  time,  con- 
ceivably be  operated  at  a  lower  cost.  Permanent  relief  was 
granted  by  the  Commission  in  comparatively  few  of  such 
instances;  and  then  only  when  it  appeared  either  that  the 
short  line  had  observed  the  distance  principle  throughout,  or 
else  that  the  intermediate  rates  upon  the  long  line  were  appar- 
ently reasonable  and  just,  in  and  of  themselves.  Under  such 
conditions  the  Commission  sometimes  permitted  the  circuitous 
route,  especially  if  it  were  manifestly  so,  to  meet,  not  only  the 
prevailing  rate  over  the  short  line,  but  also  any  future  rate 
which  it  might  put  into  effect. 

Next  in  importance,  measured  by  the  number  of  applica- 
tions for  relief  from  the  long  and  short  haul  clause  in  freight 
tariffs,  were  those  based  upon  the  exigencies  of  market  competi- 
tion. The  familiar  case  of  the  rivalry  of  Florida  and  California 
orange  growers  in  the  eastern  markets  may  illustrate  the  situa- 
tion.^ The  growers  must  be  put  into  that  market  and  held 
there  in  each  case  in  competition  with  one  another,  each  served 
by  the  carriers  who  profited  by  their  traffic.  Should  it  be  said 
that  because  such  market  competition  compelled  a  low  through 
rate,  irrespective  of  distance,  that  no  higher  rate  at  any  inter- 
mediate point  where  such  market  competition  did  not  exist, 
should  be  allowed?  The  difficulty  and  danger,  however,  of 
accepting  the  justification  of  market  competition  was,  of  course, 
the  fact  that  exemption  from  the  distance  principle  might  deny 
to  the  intermediate  points  the  advantage  to  which  they  were 
justly  entitled  by  reason  of  their  geographical  location.^  The 
compelling  force  of  market  competition  is  exemplified  also  in 
the  transportation  of  pine  lumber  from  all  along  the  southern 
tier  of  states  to  the  consuming  territory  of  the  treeless  Middle 
West.  The  mills  in  Mississippi,  Louisiana,  Arkansas,  and 
Texas  are  so  much  nearer  than  those  in  Florida  or  Georgia,  that 

1  14  LC.C.  Rep.,  476. 

2  Cf,  instances  cited  by  Judge  Knapp  before  the  Senate  (Elkins)  Com- 
mittee, 1905,  IV,  p.  3294.  Hammond,  Rate  Theories  of  the  LC.C,  also 
marshals  these  cases. 


606  RAILROADS 

exceptionally  low  rates  per  mile  must  be  put  in  from  these 
latter  states  to  enable  them  to  hold  their  own.  Such  excep- 
tionally low  rates,  if  applied  to  all  intermediate  points,  would, 
of  course,  prove  ruinously  unprofitable  to  the  railroads  con- 
cerned. There  were  certainly  contingencies  of  this  sort  entitled 
to  relief. 

Closely  akin  to  market  competition  in  compelling  departure 
from  the  long  and  short  haul  clause,  were  the  practices  arising 
in  connection  with  commodity  rates  to  meet  special  circum- 
stances in  production  or  consumption.  A  public  building, 
perhaps,  was  to  be  erected  at  a  given  point;  and  active  competi- 
tion arose  from  quarrymen  in  different  parts  of  the  country  for 
supplying  the  cut  stone.  A  carrier  serving  such  a  quarry  put 
in  a  special  carload  rate  in  order  to  enable  the  shipper  on  its 
line  to  compete  for  the  contract.  No  similar  commodity  rates, 
as  a  fact,  were  called  for  from  intermediate  stations,  inasmuch 
as  no  other  quarries  on  the  line  were  interested  in  this  particular 
job.  The  Commission  ruled  in  such  cases  that  no  tariffs  from 
intermediate  points  need  be  filed,  unless  desired  for  the  benefit 
of  some  other  shipper.  Such  cases  are  obviously  analogous  in 
principle  to  those  above  mentioned  under  the  heading  of  market 
competition. 

The  third  and  perhaps,  as  it  may  appear  in  the  future,  the 
most  substantial  ground  for  seeking  relief  from  the  long  and 
short  haul  clause  in  freight  rates  was  the  force  of  water  compe- 
tition. For  example,  all  along  the  Atlantic  seaboard  the  low 
rates  of  coastwise  steamships  were  absolutely  compelling  in 
their  effect  upon  through  rates  by  rail.  Obviously  the  railroads 
could  not  share  in  the  business,  unless  they  met  the  low  water 
rate,  —  a  low  water  rate  which,  very  properly,  ought  not  to 
affect  the  higher  charges  at  interior  intermediate  points  not 
enjoying  such  competition  by  water.  On  the  other  hand,  it 
was  evident  that  the  utmost  care  needed  to  be  exercised  in 
accepting  this  excuse  for  the  lower  rate  at  the  more  distant 
point;  or,  otherwise  stated,  for  higher  rates  at  the  intermediate 


LONG  AND  SHORT  HAUL  CLAUSE  607 

points  not  in  the  enjoyment  of  water  competition.  It  was 
unquestionable,  as  experience  all  over  the  country  had  demon- 
strated, that  the  force  of  such  competition  upon  internal  water- 
ways had  been  greatly  exaggerated  by  the  railroads  for  their 
own  purposes.  The  steamboats  had  disappeared  from  the 
Mississippi  and  all  its  branches,  and  from  the  smaller  rivers  of 
the  southern  states,  not  because  they  were  surpassed  either 
in  speed  or  in  economy,  but  by  reason  of  the  superior  organiza- 
tion and  certainty  of  through  shipments  by  land.^  The  railroad 
always  beat  the  steamboat,  mainly  because  it  was  not  hampered 
by  the  difficulty  of  breaking  bulk  at  transfer  points.  The 
river  boat  served  relatively  few  places,  while  the  railroad  could 
make  connections  everywhere.  And,  finally,  the  water  lines, 
being  open  at  all  times  to  competition  for  the  worth-while 
business  from  rivals  who  needed  merely  to  assemble  enough 
capital  to  buy  a  boat,  could  not  distribute  their  margin  of  profit 
according  to  the  pressure  of  competition  at  different  points 
along  every  line.^  Whether  a  revival  of  commerce  upon  our 
inland  waterways  will  ever  change  the  nature  of  this  competi- 
tion between  water  and  land  transportation  remains  to  be  seen. 
But,  in  the  meantime,  it  was  indubitable  that  the  plea  of  com- 
petition by  water  required  careful  examination  before  being 
accepted  at  its  face  value.  The  importance  of  this  considera- 
tion appears  clearly  in  connection  with  the  Intermountain  rate 
cases,  soon  to  be  discussed. 

The  petition  of  the  Southern  Pacific  Railroad  for  exemption 
from  the  prohibition  of  the  amended  long  and  short  haul 
clause  in  1912,^  as  to  rates  between  San  Francisco  points  and 
Portland,  Oregon,  presented  a  concrete  problem  in  the  fair 
adjustment  of  distant  and  intermediate  rates  under  the  force  of 
coastwise  water  competition.  There  was  no  question  as  to  the 
force  of  this  rivalry;    more  than  three-fourths  of   the  traffic 

^  Cf.  F.  H.  Dixon,  A  Traffic  History  of  the  Mississippi  River;  Doc.  11, 
Report  National  Waterways  Commission,  1911. 

2  CJ.  pp.  385,  566,  swpra,  and  638,  injra.         ^  22  I.C.C.  Rep.,  366. 


608 


RAILROADS 


between  the  distant  seaports 
moving  by  boat.     The  geogra- 
phical situation  is  shown  by 
the  map  herewith.     But   the 
difficult  point  to   decide  was 
as  to  whether  the  intermediate 
rates  were   not   too   high  by 
comparison,  —  being  made,  in 
other    words,    to    compensate 
unduly  for  the  low  rates  and 
loss  of  traffic  at  the  two  ends 
of  the  line.    The  high  interme- 
diate point  was  Talent.     The 
first-class  San  Francisco-Port- 
land rate  for  746  miles  was  51 
cents  per  hundred  pounds,  as 
against  a  San  Francisco-Tal- 
ent rate  for  409  miles  of  $1.66, 
—  more  than  three  times  the 
charge  for  about  one-half  the 
haul.       Moreover,  the   inade- 
quacy of  water  competition  as 
a    full    explanation    appeared 
at  many  points.     Albany,  for 
example,  was  no  farther  from 
Portland  than  Sacramento  was 
from  San  Francisco.  Yet  while 
Sacramento  enjoyed  the  low 
water  rate  north  bound,  nei- 
ther Albany  nor  other  places 
much    nearer    Portland    were 
given  the  same  advantage  in 
southerly     shipments.       This 
case,  left  open  for  further  ex- 
amination as  to  facts,  is  also 


LONG  AND  SHORT  HAUL  CLAUSE  609 

interesting  as  to  points  at  law.  The  carrier,  as  in  the  Inter- 
mountain  rate  cases,  contended  that  under  the  amended  long 
and  short  haul  clause,  the  Commission  need  consider  only  the 
force  of  water  competition;  and  need  not  concern  itself  with 
the  reasonableness  of  the  intermediate  rates.  The  Commis- 
sion held  this  not  to  be  a  right  corstruction  of  the  law. 

The  reasons  for  seeking  exception  from  the  long  and  short 
haul  clause  in  passenger  business,  judging  by  the  petitions  filed 
by  carriers  under  the  new  law,  had  to  do  mainly  with  complica- 
tions following  the  establishment  of  mileage  schedules  by  law 
in  the  different  states.  Some  of  these  states  had  also  enacted 
two-cent  fare  laws,  in  which  case  it  often  happened  that  intra- 
state fares  were  arbitrarily  higher  than  those  which  applied  on 
interstate  business.  But  the  main  reason  for  seeking  exemption 
from  the  Fourth  Section  was  the  desire  of  circuitous  routes  to 
meet  the  charges  made  by  the  short  lines.  Obviously,  as  in 
freight  traffic,  the  long  line  could  not  charge  more  than  the  short 
line,  and  usually  the  short  line  made  the  rate.  Practically 
under  such  circumstances,  the  long  line  carrier  could  not  well 
maintain  a  higher  fare  to  the  intermediate  point,  since  in  pas- 
senger traffic,  unlike  freight,  the  traveller  could  if  he  pleased 
buy  his  ticket  to  the  more  distant  point  and  then  get  off  at  the 
intermediate  one.  The  Commission,  in  view  of  this  fact,  natu- 
rally found  less  flagrant  violations  of  the  distance  principle  in 
passenger  fares  than  in  freight  rates. 

What  economic  reasons  among  all  these  advanced  by  the 

railroads,  should  be  accepted  by  the  Commission  as  warranting 

a  departure  from  the  distance  principle?    Originally,  as  we  have 

seen,  it  was  held  that  competition  either  with  carriers  by  water, 

with  railroads  not  subject  to  the  Act,  or  other  rare  and  peculiar 

cases,  created  such  dissimilarity  of  circumstances  and  conditions 

as  to  warrant  a  modification  of  the  distance  principle.^     In  the 

first  great  case  under  the  amended  law,  the  Commission  held, 

more  broadly,  that  other  factors  than  these  might  properly  be 

1  P.  473,  supra. 
VOL.  1—39 


610  RAILROADS 

taken  into  account.  It  considered  itself  authorized  not  merely 
to  decide  whether  circumstances  in  respect  of  competition  at  the 
two  points  were  dissimilar,  but  also  whether,  and  to  what  extent, 
that  dissimilarity  justified  a  departure  from  the  rule.  In  other 
words,  as  interpreted  by  the  Commission,  modification  of  the 
rule  might  be  permitted  to  just  the  degree  which  would  seem  to 
be  called  for  by  consideration  of  the  whole  situation.  The 
best  way  to  understand  the  bearing  of  these  considerations, 
however,  will  be  to  examine  this  first  great  case  in  detail. 

The  Intermountain  rate  cases,  affording  the  first  crucial  test 
of  the  long  and  short  haul  amendments  of  1910,  were  doubly 
significant.  They  afforded  a  prime  example  of  the  struggle 
for  supremacy  between  the  administrative  and  the  judicial 
branches  of  the  government.  And  they  also  stood  foremost 
among  all  the  transportation  controversies  of  the  last  genera- 
tion.^ The  grievances  were  long-standing.  They  had  been 
before  the  Interstate  Commerce  Commission  since  1889.^  They 
comprehended  geographically  a  range  of  interests  covering  the 
entire  northern  half  of  the  United  States.  While  the  Rocky 
mountain  territory  and  the  Pacific  coast  terminals  were  most 
directly  concerned,  the  rights  in  trade  of  every  factory  and  dis- 
tributing point  east  of  Denver  were  indirectly  involved,  in  so 
far  as  they  participated  in  commerce  with  the  Far  West.  Not 
even  the  inevitable  conflict  over  remodelling  the  southern  bas- 
ing point  system  by  enforcement  of  the  new  fourth  section  of 
the  Mann-Elkins  law,  was  equal  to  this  one,  either  in  geographi- 
cal scope  or  commercial  importance.  And  at  the  same  time 
the  fact  that  the  new  Commerce  Court  was  in  1912  on  trial  for 
its  life  —  this  being  one  of  its  leading  cases  on  appeal — endowed 
the  controversy  with  an  even  greater  significance.  Both  in 
the  eyes  of  the  law  and  of  commerce  and  finance,  the  issue 
was  plainly  of  the  first  importance. 

1  Already  discussed  in  other  connections  in  chapters  VII  and  XI. 

2  5  I.C.C.  Rep.,  478,  510. 


INTERMOUNTAIN    RATE    CASES  611 

The  transportation  grievance  of  the  tier  of  Rockj'  mountain 
communities  from  Washington  to  Arizona,  although  simple, 
divided  naturally  into  two  parts.  ^  The  first  was  that  the  freight 
rates  from  all  eastern  territory  to  these  localities  were  from  one- 
quarter  to  over  one  hundred  per  cent,  higher  than  to  the  Pacific 
coast,  although  the  goods  in  transit  passed  their  very  doors  and 
might  be  hauled  a  distance  greater  by  one-fourth.  A  carload 
of  glassware  from  Pittsburg  to  Spokane,  Washington,  paid  a 
freight  rate  of  $649.44;  while  the  charge  to  Seattle,  four  hundred 
miles  farther  west,  was  only  $393.60.  A  first-class  commodity 
(carload)  rate  from  Omaha  to  Reno,  Nevada,  was  $858.  If  the 
goods  were  delivered  154  miles  farther  west,  at  Sacramento, 
passing  through  Reno  en  route,  the  freight  bill  amounted  to  but 
six  hundred  dollars.  But  this  discrimination  was  less  than  half 
the  indictment,  inasmuch  as  the  compelling  force  of  ocean  com- 
petition at  the  coast  was  conceded  by  all.  It  might  well  be  that 
San  Francisco  and  its  sister  terminal  points  were  unreasonably 
favored,  rather  than  that  the  intermountain  rates  were  unduly 
high  in  themselves.  The  carriers  by  land  might  indeed  be,  as 
they  alleged,  powerless  in  the  face  of  a  water  competition 
beyond  their  control.  And  if  they  were  thus  impotent,  surely 
the  government  could  not  account  their  tariffs  unlawful,  how- 
ever irregular  they  might  be. 

The  second  item  in  the  complaint  of  the  intermountain  cities 
showed  the  cloven  hoof  of  the  transcontinental  carriers.  These 
mountain  rates,  relatively  so  high  by  comparison  with  more 
remote  terminals,  were  equally  high  from  every  point  east  of 
Denver  over  a  territory  two  thousand  miles  in  width. ^  In 
other  words,  entirely  regardless  of  distance,  the  freight  rate  to 
Spokane  or  Reno,  whether  from  New  York,  Chicago,  St.  Paul, 
Omaha,  or  even  Denver,  was  the  same.     It  was  indeed  a  blanket 

1  For  Spokane,  15  I.C.C.  Rep.,  376  (1909);  19  Idem,  162  (1910);  21 
Idejn,  400  (1911).  For  Nevada:  19  Idem,  238  (1910)  and  21  Idem,  329 
(1911).  The  latest  Denver  case  is  15  Idem,  555.  For  Salt  Lake  City  10 
Idem,  218. 

2  Shown  by  a  map  in  19  I.C.C.  Rep.,  241. 


612  RAILROADS 

rate,  like  the  fixed  charge  of  two  cents  for  postage.  And  it 
made  no  difference  how  near  any  point  in  this  wide  zone  might 
be,  the  disparity  in  rates  against  the  intermountain  points 
was  relatively  the  same.  Thus  our  two  concrete  examples, 
above  cited,  were  for  shipments  from  Pittsburg  and  Omaha, 
respectively;  but  in  any  case,  were  the  point  of  origin  as  remote 
as  Portland,  Maine,  or  even  as  near  as  Colorado  "common 
points,"  the  disparity  of  rates  was  unchanged.  They  were 
always  very  much  higher  to  the  intermountain  cities  than  on  to 
the  Pacific  coast;  although  the  carriers  east  of  the  Missouri 
river  got  no  more  for  their  portion  of  the  haul  when  the  goods 
were  bound  for  Spokane  than  if  they  went  on  to  Seattle  for  a 
much  lower  through  charge.  This  latter  fact,  of  course,  nar- 
rowed the  complaint  down  to  the  policy  of  the  western  lines. 
The  discrimination,  if  it  were  one,  was  clearly  of  their  making. 
Whatever  trouble  there  was,  originated  west  of  the  Missouri 
river.  However  much  the  other  railroads  all  over  the  country 
might  have  joined  in  transcontinental  business,  they  remained 
impartial  onlookers  in  this  particular  contest. 

Some  of  the  causes  of  the  apparently  abnormal  western  rate 
adjustment  are  perfectly  plain.  The  low  rates  to  the  coast  were 
due  to  water  competition,  which,  while  now  under  some  measure 
of  railroad  control  —  partially  "neutralized"  in  fact^  —  was 
always  present  and  potentially  great.  It  will  be  even  more 
controllmg  when  the  Panama  Canal  is  opened.^  To  meet  this 
situation,  the  carriers  had  established  a  series  of  through  com- 
modity rates  which  practically  covered  all  transcontinental 
business.  For  all  this  trafi^c  exposed  to  water  competition, 
it  was  averred,  the  intermountain  territory  was  more  remote, 
if  not  geographically,  at  least  for  purposes  of  rate  making. 
The  railroads  consequently  added  the  charge  for  the  local  haul 
back  from  the  coast  to  the  low  transcontinental  or  through  rate 

1  19  I.C.C.  Rep.,  250;  21  Idem,  351,  416-421;  Dunn,  The  American 
Transportation  Question,  pp.  178-221.     Railway  Age  Gazette,  LIII,  p.  202. 

2  Cf.  chap.  XX,  infra. 


INTERMOUNTAIN    RATE    CASES  613 

in  determining  the  charge  to  all  the  intermediate  cities.  Thus, 
they  alleged,  a  discrimination  was  forced  upon  them,  not  of  their 
own  creation.  They  could  not  grade  all  their  intermediate 
rates  down  to  a  through  tariff  thus  fixed  at  the  farther  end. 
It  would  mean  bankruptcy.  Thus  far  the  situation  is  analogous 
to  Hadley's  classic  oyster  car  case.^  The  main  difficulty  arose 
in  satisfactorily  explaining  the  second  half  of  the  scheme.  How 
did  the  blanket  or  ''postage  stamp"  rate  zone  arise,  permit- 
ting exactly  the  same  rates,  whether  to  Spokane  or  Seattle, 
from  points  scattered  over  a  territory  covering  practically 
two-thirds  of  the  United  States?  Was  it  an  artificial  scheme, 
modifiable  at  the  will  of  the  carriers  or  of  the  government; 
or,  like  the  law  of  gravitation,  was  it  beyond  the  control  of 
either? 

The  truth  was  that  westbound  rates  from  New  York,  Chicago, 
Omaha  and  St.  Paul  had  come  to  be  fixed  at  the  same  level, 
not  by  water  competition  primarily,  but  by  the  forces  of  com- 
mercial rivalry  between  centres  bidding  for  the  far  western 
market.  They  were  originally  graded  somewhat  according  to 
distance  in  the  early  days.^  And  it  is  plain  that  water  competi- 
tion, at  first  confined  to  the  Atlantic  seaboard,  gradually  ex- 
tended inland.  In  order  to  secure  the  business  to  San  Francisco 
by  steamer  or  clipper  ship,  rail  charges  from  Pittsburg  or 
Buffalo  back  to  Philadelphia  or  New  York  had  been  absorbed 
in  the  through  rate,  thus  gradually  extending  the  benefits  of 
water  competition  farther  and  farther  west  from  the  seaboard 
cities.^  And,  of  course,  as  population  and  manufactures  grew 
in  the  Middle  West,  the  narrow  fringe  of  such  competition 
steadily  and  inexorably  spread  in  from  the  Atlantic  coast  over 
a  wide  zone  of  blanket  rates,  all  based  on  New  York.  The 
direct  all-rail  carriers,  naturally,  met  this  competition  at  all 
points.     Manufactures   and   population   continued   to   spread 

1  P.  217,  supra. 

2  9  I.C.C.  Rep.,  318  et  seq.     Reprinted  in  our  Railway  Problems. 
»  Cf.  U.  S.  V.  U.  P.,  etc..  Evidence,  I,  p.  295. 


614  RAILROADS 

toward  the  West;  but,  imperceptibly,  a  new  competitive  factor 
appeared.  As  the  force  of  direct  water  competition  lessened 
with  ever-widening  distance  inland  from  the  Atlantic,  market 
competition  began  to  gather  strength.  One  need  not  go  so  far 
as  to  concede  that  "market  competition  is  a  euphemism  for 
railroad  policy,"  in  order  to  realize  that  artificial  rather  than 
natural  influences  gradually  came  to  bear  in  the  westward 
extension  of  the  blanket  rate.  The  trans-Missouri  lines,  get- 
ting the  whole  rate  on  shoes  made  in  St.  Louis  for  the  Pacific 
slope,  while  only  getting  a  part  of  it  if  the  goods  came  from 
New  England,  had  a  direct  motive  to  put  St.  Louis  into  the 
western  market  and  thereafter  to  hold  it  there  at  all  cost. 
Every  increment  in  the  St.  Louis  traffic,  moreover,  was  surely 
theirs  for  ever.  It  could  not  be  stolen  away  by  Canadian 
railways  or  ocean  steamship  lines,  as  it  might  if  it  originated  at 
Boston.  It  became  a  settled  policy  of  these  western  lines, 
therefore,  to  meet  even  the  water-compelled  seaboard  rates  at 
all  points,  no  matter  how  far  inland.  The  blanket  zone  thus 
steadily  widened,  out  of  all  semblance  to  its  originally  modest 
proportions  as  based  upon  water  competition  alone.  A  compe- 
tition originally  natural,  gradually  merged  into  another  of  an 
entirely  artificial  sort. 

The  importance  of  both  the  intermountain  and  Pacific  coast 
traffic  originating  along  the  western  confines  of  the  blanket  zone, 
steadily  increased.  One  record  showed  that  three-fourths  of 
the  business  at  Reno,  Nevada,  originated  west  of  Chicago.^  It 
all  moved  on  the  same  rate  as  freight  from  Portland,  Maine, 
whether  destined  to  Nevada  or  to  the  Pacific  coast.  The  dis- 
parity against  Nevada  remained  absolutely  the  same  in  either 
case.  It  was  to  hold  this  traffic,  originating  west  of  Chicago, 
against  all  eastern  competitors,  that  the  blanket  zone  was  so 
abnormally  widened  by  the  trans-Missouri  railroads. 

For    years    the    transcontinental    rate   scheme    had    been 
before  the  Interstate  Commerce  Commission.    A  number  of 
*  Cf.  Railway  Age  Gazette,  LIII,  p.  201. 


INTERMOUNTAIN    RATE    CASES  615 

decisions  *  were  rendered  prior  to  1910,  under  the  old  long  and 
short  haul  clause,  emasculated  as  it  was  by  the  Alabama  Mid- 
land decision  of  1896.  The  Hepburn  amendments  of  1906  had 
so  far  strengthened  the  hands  of  the  Commission  that  it  made 
several  attempts  to  deal  with  the  question.  But  the  orders 
in  these  cases  were  confined  to  classified  tonnage,  although  it 
was  clear  that  most  of  the  transcontinental  business  moved 
under  commodity  rates.  Such  carload  or  wholesale  tonnage,  of 
course,  was  the  only  sort  actually  affected  by  the  competition 
by  sea.  This  fact  greatly  aggravated  the  discrimination 
against  which  the  intermountain  cities  complained.  For,  in 
absence  of  such  water  competition,  they  enjoyed  relatively 
fewer  commodity  ratings.  And  their  youthful,  though  am- 
bitious, jobbing  trade  was  dependent  upon  just  such  special 
carload  rates  in  competition  with  middlemen  on  the  Paci- 
fic coast.  If  "tin  boxes  and  lard  pails,  nested"  moved  in 
carloads,  Seattle  got  them  from  "anywhere  east"  for  a  com- 
modity rate  of  eighty-five  cents,  as  against  the  regular  fourth- 
class  rate  to  Spokane  of  $1.90  per  hundred  pounds.  The 
Commission  grappled  with  the  problem  of  such  discrimination 
manfully;  but  made  little  headway  until  the  new  law  of  1910 
put  it  in  better  case.  Then  for  the  first  time  it  tackled  the  heart 
of  the  matter,  in  revising  the  commodity  rates  in  the  great  cases 
now  under  review.  There  is  evidence  that  the  railroads  were 
already  endeavoring  to  remodel  their  tariffs,  under  pressure  in 
some  degree  from  the  Commission  even  before  the  amendment 
of  the  law  in  1910.  It  was  recognized  that  some  modification 
of  the  existing  scheme  was  needed.^  And  it  was  relatively  easy 
to  re-arrange  mere  class  rates.'  They  were  little  affected  by 
water  competition.  But  the  commodity  schedules,  concerned 
in  these  later  cases,  were  far  more  important  commercially. 

^  Best  reviewed  in  Brief  for  the  United  States  in  U.  S.  v.  Atchison, 
Topeka  and  Santa  Fe  Railivay,  etc.:  Supreme  Court,  October  term,  1911, 
p.  10. 

2  Railway  Age  Gazette,  May  14,  1909,  and  November  25,  1910. 

3  Brief  for  U.  S.,  loc.  ciL,  p.  12. 


616  RAILROADS 

Two  plans  were  possible  to  mitigate  the  violation  of  the 
distance  principle.^  The  rates  to  intermediate  points  might 
be  lowered  conformably  to  the  long-distance  standard.  This 
would  enable  the  railroads  to  hold  the  coast  traffic  against  the 
water  lines,  but  v/ould  decrease  the  revenues  from  "way" 
business.  Or,  on  the  other  hand,  the  coast  rates  might  be  put 
up,  regardless  of  water  competition,  in  the  expectation  that 
much  through  business  would  still  go  by  rail.  Tariffs  by  land 
were  already  considerably  higher  than  by  the  sea  routes.  Possi- 
bly the  rail  rates  might  be  increased  somewhat  further.  Some 
coast  business  would  be  lost  to  the  water  lines,  but  on  what 
remained  a  higher  return  would  accrue.  Moreover,  a  con- 
siderable development  of  interior  distributing  centres  would 
be  bound  to  ensue.  And,  best  of  all,  the  grievances  of  the 
interior  places  would  be  somewhat  mitigated.^  Unfortunately 
the  Pacific  coast  points  were  in  an  uproar  at  this  threat  against 
their  supremacy  in  the  jobbing  business.  And,  in  the  meantime, 
the  new  powers  under  which  the  present  proceedings  were  taken 
had  been  conferred  by  the  Mann-Elkins  law.  The  carriers 
unaided  could  probably  not  have  greatly  bettered  matters. 
But  the  government,  at  all  events,  chose  to  deal  with  it;  so 
that  these  private  attempts  came  to  naught.  Subsequently 
such  action  as  the  carriers  took,  naturally  assumed  the  form  of 
increases  at  terminals  rather  than  reductions  at  intermediate 
points. 

The  new  orders  ^  were  radically  different  from  the  preceding 
ones,  not  only  in  applying  to  commodity  rates,  under  which 
most  of  the  tonnage  really  moved,  but  also  in  respect  of  the 
form  of  remedy  proposed.  In  order  to  correct  the  discrimination, 

1  191  Fed.  Rep.,  861. 

2  The  plan  is  in  Railway  Age  Gazette,  June  4,  1909,  p.  1182.  New  tariffs 
are  described  in  ibid.  Cf.  also  Boston  Transcript,  November  28,  1910,  for 
other  plans. 

3  21  I.C.C.  Rep.,  329,  400.  Both  the  Spokane  and  Nevada  cases  are 
combined  in  the  appeal  to  the  Supreme  Court;  as  is  also  the  independent 
order  of  the  Commission  denying  relief  from  the  fourth  section  to  the  Union 
Pacific  and  other  roads. 


INTERMOUNTAIN    RATE   CASES  617 

the  previous  decisions  prescribed  the  absolute  rates  to  be  put 
into  effect  at  various  points.  The  new  orders  did  not  estabUsh 
absolute  rates  at  all,  but  endeavored,  instead,  to  set  up  a  system 
of  relative  rates  or  differentials.  All  the  former  decisions 
had  held  the  intermountain  rates  inherently  unreasonable. 
The  new  opinions  treated  them  as  only  relatively  so.  A  clear 
distinction  was  drawn  between  real  water  competition  and  that 
pseudo  water  competition  which,  as  has  been  said,  resolved 
itself  practically  into  a  mere  competition  of  markets  with  one 
another.  The  guiding  principle  adopted  was  that  the  force  of 
water  competition,  —  the  only  one  entirely  beyond  the  carriers' 
control,  —  of  necessity  increased  with  the  proximity  of  the 
shipping-point  to  the  Atlantic  seaboard.  Business  from  New 
York  to  Seattle  by  rail  had  to  go  at  rates  compelled  by  the  riv- 
alry of  steamship  lines.  Traffic  from  Omaha  to  Reno,  Nevada, 
was  surely  free  from  it.  Yet  under  the  then  existing  system 
no  distinction  whatever  was  made  between  the  two  sets  of 
circumstances.  All  rates  were  blanketed,  regardless  of  remote- 
ness from  the  eastern  seaports.  The  new  governmental  order 
substituted  a  series  of  zones  suggestive  of  those  so  long  prevalent 
in  trunk  line  territory.^  These  are  shown  by  the  map  on 
page  618.  As  one  passed  westward  from  zone  IV,  with  water 
competition  under  full  pressure  at  New  York,  the  influence  of 
the  roundabout  carriers  by  sea  progressively  diminished;  until, 
at  last,  beyond  the  Missouri  it  became  nil.  Such  water  com- 
petition affording  the  only  pretext  for  a  grant  of  lower  rates  to 
the  Pacific  terminals  than  to  intermountain  points,  it  followed, 
logically,  that  the  disparity  in  charges  between  such  mterior  and 
coastal  places  should  decrease  pari  passu  with  the  westward 
movement  of  the  originating  point.  A  substantially  lower  rate 
from  New  York  to  San  Francisco  than  from  New  York  to 
Nevada  might  be  permitted;  but  no  such  difference,  relatively, 
ought  to  obtain  from  St.  Paul  or  Omaha  to  San  Francisco  as 
compared  with  Rocky  mountain  territory.  For  these  inland 
1  Chap.  X,  supra,  especially  the  map  facing  p.  365. 


618 


RAILROADS 


initial  points  were  practically  beyond  the  range  of  steamship 
rivalry. 

Specifically,  the  Commission  in  these  orders  forbade  any 
higher  charge  to  the  mountain  points  from  any  part  of  zone  I 
than  applied  to  the  Pacific  terminals.     From  zone  II,  lying 


}  '^•--,^^3:s-~- 

^-^ 

/ 

J    ?^ 

V^ 

/ 

,St.Pau.l\             hi 

w< 

/ 

c 

(            tReno 
V3an-  FrancUeo 

IV 

) 
\ 

( 

^— v^ 

h 

^ 

X 

jf^ 

^=^ 

four  hundred  miles  more  to  the  east,  there  would  probably 
never  be  any  considerable  traffic  coming  back  to  New  York 
in  order  to  go  round  by  sea,  but  in  rare  instances  there  might 
be  some.  From  this  zone,  therefore,  intermountain  rates  might 
be  not  more  than  seven  per  cent,  above  those  to  the  Pacific 
terminals.  And  so  on  as  one  went  east.  Rates  from  zone  III 
might  be  not  more  than  fifteen  per  cent,  higher  to  Spokane 


INTERMOUNTAIN    RATE   CASES  619 

than  to  Seattle.  From  zone  IV  to  Rocky  mountain  territory 
they  might  be  twenty-five  per  cent,  above  those  to  San  Fran- 
cisco; but  the  disparity  against  the  intermountain  territory, 
even  from  here  with  water  competition  in  full  effect,  must 
never  exceed  this  percentage. 

This  ingenious  plan  certainly  commends  itself  in  principle 
to  the  economic  student.  It  restored  in  a  measure  the  grada- 
tions existing  in  1887.^  It  did  not  create  the  zones  out  of  whole 
cloth.  It  utilized  a  scheme  for  division  of  territory  already 
adopted  by  the  transcontinental  lines  for  other  purposes. ^ 
And,  most  important  of  all,  it  was  elastic,  not  prescribing  ab- 
solute rates,  but  resting  content  with  laying  emphasis  upon  the 
need  of  gradation.  Yet  it  granted  a  substantial  measure  of 
relief  from  the  present  disparity  of  rates.  For,  whereas  the 
former  intermomitain  tariffs  from  the  East  were  from  fifty  to 
one  hundred  per  cent,  above  those  to  the  Pacific  coast,  the 
difference  under  this  order  might  never  exceed  twenty-five  per 
cent.  The  new  scheme  was  cleverly  planned,  also,  from  a  legal- 
strategic  point  of  view.  It  could  scarcely  be  attacked  under 
the  Fourteenth  Amendment  as  confiscatory,  inasmuch  as  it 
left  so  much  latitude  to  the  carriers  in  the  readjustment  of  their 
tariffs.^  To  overset  it  on  this  ground,  they  must  prove  that 
disaster  would  result  from  the  particular  rates  which  they 
had  chosen  to  adopt.  This  would  be  an  impossible  task.  The 
only  choice  remaining  to  the  carriers,  therefore,  would  be  to 

1  9  I.C.C.  Rep.,  318.  The  first  suggestion  I  find  of  graded  rates  is 
in  the  dissenting  opinion  in  this  St.  Louis  Business  Men's  League  case. 
Reprinted  in  our  Railway  Problems. 

2  Brief  for  U.  S.,  loc.  cit.,  p.  55.     Annual  Report  I.C.C,  1911,  p.  31. 

^  A  compromise  offered  by  the  railways  and  accepted  by  commercial 
bodies  pending  the  Supreme  Court  decisions  was  filed  June  18,  1912.  It  is 
estimated  to  save  Spokane  shippers  alone  about  $500,000  annually.  Class 
rates  are  the  Commission's  from  the  seaboard,  but  from  interior  points  are 
somewhat  lower.  The  acceptance  of  the  distance  principle  is  the  significant 
point. 

"As  the  distance,  St.  Paul  to  Spokane,  approximately  1500  miles,  is 
150  per  cent,  of  the  distance  Omaha  to  Salt  Lake,  approximately  1000  miles, 
a  reasonable  rate  from  St.  Panl  to  Spokane  would  not  be  less  than  130 


620  RAILROADS 

attack  the  order  on  the  ground  that  the  Commission  was  ex- 
ceeding its  powers,  delegated  by  Congress.  This,  in  effect, 
was  what  was  done.^ 

The  opinion  of  the  Commerce  Court,  ^  setting  aside  the 
intermountain  rate  orders  of  the  Interstate  Commerce  Com- 
mission, will  shortly  be  reviewed  by  the  Supreme  Court  of  the 
United  States,  to  which  tribunal  appeal  was  promptly  taken.'' 
Disregarding  the  dissenting  opinion  that  the  entire  long  and 
short  haul  clause,  as  amended  in  1910,  was  unconstitutional,  there 
were  three  significant  differences  between  the  two  tribunals. 

The  first  point  at  issue  between  the  court  and  the  Com- 
mission concerned  the  differentiation  of  water  competition  from 
so-called  market  competition.*  The  Commerce  Court  refused 
to  recognize  any  distinction  between  the  cause  of  lower  rates  to 
the  Pacific  coast  from  Omaha  or  from  New  York,  respectively. 
It  ascribed  the  disparity  in  all  cases  to  competitive  forces 
entirely  beyond  the  railroads'  control  "If  the  carrier  from  St. 
Paul,  in  order  to  meet  new  water  competition  from  New  York," 
etc.  The  Commission,  on  the  other  hand,  clearly  set  apart 
market  competition,  applicable  to  western  cities,  from  that 
due  to  carriage  by  water,  which  controlled  rates  from  the  Atlantic 
seaboard.  The  railways,  it  said,  must  conform  in  their  rate- 
making  policies  to  the  latter.     They  were  not  bound  by  the 

per  cent,  of  the  rate  from  Missouri  river  to  Salt  Lake,  and  in  the  proposed 
tariff  rates  from  St.  Paul  to  Spokane  would  be  made  accordingly. 

"From  Mississippi  common  points  as  defined  by  current  tariffs,  the 
rates  would  be  112|  per  cent,  of  the  St.  Paul  rates. 

"From  Chicago  and  common  points,  the  rates  would  be  1161  per  cent, 
of  St.  Paul  rates. 

"From  Detroit  and  common  points,  125  per  cent,  of  the  St.  Paul  rates. 

"From  Buffalo,  Pittsburg  and  common  points,  130  per  cent,  of  St. 
Paul  rates. 

"From  Now  York,  Boston  and  common  points,  130  per  cent,  of  St. 
Paul  rates. 

"From  Colorado  common  points,  90  per  cent,  of  St.  Paul  rates." 

1  Cf.  Railwaij  Age  Gazette,  July  28,  1911,  p.  162. 

2  191  Fed.  Rep.,  856. 

=>  Decided  favorably  to  the  LC.C,  1914;  234  U.S.  476,  495. 
''  Market  competition  as  such  is  discussed  at  p.  118,  supra. 


INTERMOUNTAIN    RATE    CASES  621 

former.  For  market  competition  (as  already  quoted)  "is  a 
euphemism  for  railroad  policy."  ^  And,  speaking  as  an  econo- 
mist ignorant  of  the  technicalities  of  the  law,  I  venture  to 
affirm  that  the  Commission  in  this  contention  was  absolutely 
right.2  Even  as  far  west  as  South  Bend,  Indiana,  wagons  may 
go  to  California  by  the  direct  rail  route;  or,  with  a  change  of 
ten  cents  in  the  rate,  they  may  come  back  to  New  York  and 
thence  go  round  by  sea.  Such  is  the  delicacy  of  adjustment 
even  as  far  west  as  Chicago.  Hence  the  failure  to  recognize 
that  low  rates  to  the  Pacific  coast  from  points  west  of  the 
Missouri  river  were  due  to  an  entirely  different  cause  —  namely, 
the  arbitrary  determination  of  the  transcontinental  lines  to 
hold  the  fort  for  their  local  clients  against  all  odds  —  was  to 
commit  an  egregious  economic  blunder.  Furniture  goes  from 
Chicago  to  San  Francisco  on  rates  as  low  as  if  compelled  by  water 
competition.^  But  steamships  never  carry  commodities  of 
this  bulky  sort,  even  from  New  York.  How  much  less,  then, 
could  water  competition  apply  so  far  inland?  The  carriers 
were  bent  on  keeping  Chicago  in  the  Pacific  market.  That 
was  the  real  reason.  The  Commerce  Court  clearly  missed  the 
main  point. 

Equally  sound  economic  evidence  that  water  competition 
alone  was  not  responsible  for  the  entire  present  transcontinental 
rate  system,  was  afforded  by  the  fact  that  the  wide  blanket  zone, 
already  described,  covering  two-thirds  of  the  United  States  for 
westbound  rates,  found  no  counterpart  in  the  scheme  under 
which  rates  were  made  up  in  the  opposite  direction.*  It  is  a 
poor  rule  which  will  not  work  both  ways.  And  surely  water 
competition,  when  present,  should  be  potent  in  either  direction. 
It  was  undeniable  that  the  absence  of  pushing  cities  along  the 

^  21  I.C.C.  Rep.  355,  367:  the  Transcript  of  Testimony  in  the  Supreme 
Court  record  is  especially  illuminating.  Cf.  also  Twenty-fifth  Annual 
Report  I.C.C,  pp.  30-40. 

2  S.  O.  Dunn  in  Railway  Age  Gazette,  November,  25,  1910. 

*  Railway  Age  Gazette,  1910,  p.  1005. 

*  21  I.C.C.  Rep.,  418-423  is  best  on  this.     Cf.  also  p.  608,  supra. 


622  RAILROADS 

Pacific  slope,  desirous  of  developing  trade  relations  with  the 
Atlantic  states,  discouraged  even  the  slightest  extension  of  ter- 
minal rates  inland.  The  ironclad  monopoly  enjoyed  by  the 
Harriman  and  Hill  lines  would  probably  have  prevented  this  in 
any  event.  But  the  significant  point  was  that  there  was  no 
demand  for  a  blanlvet  zone  for  eastbound  traffic.  Hence  water- 
compelled  rates  staid  where  they  belonged;  that  is  to  say,  closely 
confined  to  the  Pacific  seaboard  cities.  Thus  it  would  also 
have  been  in  the  eastern  half  of  the  country,  had  it  not  been 
for  "market  competition" — this  artificial  factor  which  the 
Commerce  Court  failed  utterly  to  recognize  as  in  a  class  by 
itself. 

The  second  vital  difference  of  opinion  between  the  Commerce 
Court  and  the  Commission  was  economico-legal.  The  economist 
in  the  ofl^ice  of  critic  here  stands  upon  less  firm  ground.  And 
yet,  whatever  the  law  may  be,  the  reasoning  rests  upon  the 
interpretation  of  the  facts.  ^  The  Commerce  Court  held  that 
"when  the  rate  for  the  longer  haul  is  forced  unreasonably  low 
by  competition,  the  only  elements  that  can  enter  into  the  con- 
sideration of  the  rate  for  the  shorter  haul  are  its  reasonableness, " 
etc.2  The  controlling  idea,  in  other  words,  in  the  reviewing 
judicial  mind,  was  that,  so  long  as  the  rate  at  Spokane  or  Reno 
was  reasonable  in  itself,  it  was  a  matter  of  indifference  to  that 
locality  what  rate  might  be  made  to  Seattle.  All  that  the 
Commerce  Court  needed  to  do,  therefore,  was  to  consider  the 
"  intrinsic  reasonableness"  ^  of  the  intermediate  rate.  Not  so, 
held  the  Commission.  Whether  this  charge  was  reasonable 
or  not  was  a  question  of  relativity.  It  depended  upon  what 
rate  was  made  to  other  points  all  around  it  and  competitive 
with  it.  In  other  words,  the  intermediate  could  not  be  disso- 
ciated from  the  long-distance  point.  Railroads  as  public  carriers 
owed  a  common  duty  to  both  points.     No  intermediate  rate, 

'  As  analyzed  in  chapter  VII,  supra. 

2  Brief  for  the  U.  S.,  loc.  cit.,  p.  37;  Annual  Report  I.C.C.,  1911,  p.  36. 

'  In  the  Lemon  rate  cases  also;  190  Fed.  Rep.,  593.     Cf.  supra,  p.  592. 


INTERMOUNTAIN    RATE  CASES  623 

however  low  per  se,  could  be  reasonable,  if  the  carrier  was  volun- 
tarily offering  a  lower  rate  to  points  beyond.  If  its  lower  rate 
beyond  was  accorded  under  compulsion,  that  of  course  was  a 
different  matter.  But  in  so  far  as  these  low  Pacific  terminal 
rates  were  due  to  an  artificial  railroad  policy,  any  discrimination 
against  the  nearer  points  was  unwarranted. 

The  analogy  is  clear  between  this  difference  of  opinion  of 
Commission  and  court  and  that  between  the  two  schools  which 
would  base  judicial  determination  of  rates  in  general  upon  inhe- 
rent or  relative  reasonableness,  respectively.  The  "remunera- 
tion" test,  which  the  carriers'  representatives  sought  to  insert 
in  the  law  of  1906,  seeks  to  discover  innate  reasonableness  of 
rates;  not  affected,  that  is  to  say,  by  the  revenue  which  may 
accrue  from  them  in  the  aggregate.  The  other  standard  de- 
clares such  reasonableness  to  be  always  dependent  upon  cir- 
cumstances; notably  upon  the  amount  of  the  investment  and 
the  resultant  earning  power  arising  out  of  the  volume  of  business 
carried  at  the  rates  in  question.^ 

The  third  difference  of  opinion  between  court  and  Commis- 
sion was  purely  one  of  law.-  Had  the  latter  exceeded  its 
powers  delegated  by  Congress  in  attempting  to  fix  a  relation  of 
rates,  instead  of  prescribing  certain  maximum  rates  applicable  to 
particular  points?  ^  The  reasoning  followed  was  apparently 
derived  from  the  Supreme  Court  opinion  in  the  Chattanooga 
case.^  This  reasoning,  the  govermnent  now  contended  in  its 
argument  on  appeal  to  that  tribunal,  was  inapplicable  to  the 
since  amended  law.  Limits  of  space  and  the  natural  diffidence 
of  an  economist,  alike  forbid  extended  discussion  of  this  nice 
point  at  law.     The  Commission  alleged  that,  except  by  the 

^  H.  S.  Smalley  in  Anyials  of  the  American  Academy  of  Political  Science, 
March,  1907,  pp.  299-304.  Cf.  also  our  Railway  Problems,  chap.  XXIV. 
The  point  will  be  more  fully  discussed  in  vol.  II,  dealing  with  matters  of 
finance,  valuation,  etc. 

2  Annual  Report  I.C.C.,  1911,  p.  38.  Brief  for  U.  S.  Supreme  Court, 
no.  883  et  seq.,  pp.  23-37.     Also  Brief  for  I.C.C.  in  the  same  case. 

'  Commerce  Court  opinion,  p.  15.      Cf.  p.  507,  supra. 

*  181  U.  S.,  I.     Cf.  also  p.  592,  supra. 


624  RAILROADS 

exercise  of  such  authority  to  prescribe  relativity  of  rates,  it 
would  be  powerless  to  remedy  such  discriminations  in  future. 
In  consequence,  inasmuch  as  Congress  evidently  intended  to 
enable  it  to  afford  such  remedy,  authority  over  relativity  of 
rates  must  be  derived  by  necessary  implication.  And  it  is 
certain,  economically  speaking,  that  in  this  position  the  Com- 
mission was  once  more  .perfectly  right.  Whether  it  was  legally 
so  remained  yet  to  be  decided.^  In  this  connection,  it  seems 
odd  that  none  of  the  briefs  for  the  government  mentioned  an 
important  instance  of  the  undisputed  exercise  of  such  power  to 
establish  relativity  of  rates.  The  Commission  had  for  years, 
even  in  absence  of  any  express  authorization  by  law  until  1910, 
freely  prescribed  details  of  freight  classification  in  a  large 
number  of  important  cases.^  It  had  never  done  more  than  to 
fix  relativity;  and  the  constitutionality  of  its  orders  had  never 
been  attacked. 

An  entirely  new  issue  arose  at  this  point.  Prescribing 
relativity  of  rates  implied  determination  of  minimum  rates. 
For  if,  as  in  this  transcontinental  case,  the  freight  rate  to 
Nevada  points  from  New  York  might  never  be  more  than 
twenty-five  per  cent,  greater  than  to  San  Francisco,  a  lower 
limit  as  well  as  an  upper  one  was  thereby  prescribed  for  the 
latter  point,  and  vice  versa.  The  rate  to  one  point  once  fixed 
by  the  carrier,  voluntarily  if  you  please,  the  minimum  rate  to 
the  other  might  be  neceosarily  determined  thereby.  If  a  dollar 
rate  prevailed  at  Spokane,  the  Seattle  rate  must  not  fall  below 
seventy-five  cents.  Was  this  not  something  new?  Did  it  not 
suggest  fixing,  not  maximum  rates  alone,  but  absolute  rates  as 
well?  And  if  an  attempt  to  fix  absolute  rates,  was  it  not  uncon- 
stitutional? There  could  be  no  two  minds  about  the  need  of 
conferring  power  upon  the  Interstate  Commerce  Commission 

1  Of  significance  on  this  point  is  Commissioner  Lane's  dissent  in  the 
Lemon  rate  case.     P.  592,  supra. 

2  For  details,  Cf.  Hammond,  Rate  Theories  of  the  Interstate  Commerce 
Commission  (1911)  and  J.  Strombeck,  Freight  Classification  (1912).  Also 
p.  468,  supra. 


INTERMOUXTAIX    RATE  CASES  625 

over  minimum  or  differential  rates,  if  effective  government 
regulation  were  ever  to  be  attained.  This  had  been  my  con- 
tention for  years.  ^  It  had  the  best  possible  expert  support 
from  the  side  of  the  carriers.^  Discriminatory  rates  could  never 
be  corrected  until  such  power  was  delegated  by  Congress  or 
conferred  by  judicial  interpretation  of  the  law.  Kansas  City 
now  enjoys  lower  rates  to  Chicago  on  packing-house  products 
than  are  accorded  to  Omaha.  On  every  sound  principle  of  rate 
making,  the  two  cities  ought  to  be  placed  on  a  parity.  But  the 
Commission  could  not  rectify  the  abuse ;  for  the  roads  from  Kan- 
sas City  promptly  reduced  their  rates  'pari  passu  with  any  re- 
duction of  the  charge  at  Omaha.'  There  was  no  bed  rock  below 
which  rates  could  not  go.  The  Omaha  railroads  as  well  as  the 
government  were  powerless  in  face  of  the  situation. 

May  power  to  fix  mmimum  rates,  so  necessary  to  an  ade- 
quate program  of  control,  be  constitutionally  delegated  by  Con- 
gress? The  question  has  never  been  squarely  presented  to  the 
Supreme  Court. ^  But  the  language  in  many  cases  has  been 
such  as  to  indicate  that  maximum  rates  alone  may  be  la"«^ully 
established.  Is  the  reiteration  of  the  word  "maximum"  inten- 
tional? Or  may  it  be  that  the  judicial  mind  has  never  yet  con- 
templated the  need  of  regulating  the  minimum  rate?  Surely 
it  seems  an  anomaly  that  the  goverimient  should  ever  seek  to 

^  Atlantic  Monthly,  September  and  October,  1905.  On  shortcomings 
of  the  later  amendments  of  the  law,  cf.  F.  H.  DLxon,  in  Quarterly  Journal 
of  Economics,  vol.  XXIII,  1910,  p.  630. 

2  Railway  Age  Gazette,  editorial,  January  12,  1912,  p.  41;  and  S.  O. 
Dunn,  The  American  Transportation  Question,  1912. 

'  Cf.  the  Fort  Worth  case  decided  June  6,  1912;  also  the  Eau  Claire 
case,  5  I.C.C.  Rep.,  264.  The  latest  case  in  which  the  Commission  held 
that  it  had  power  to  suspend  a  proposed  reduction  in  rates  arose  from  just 
such  a  condition  of  affairs,  22  I.C.C.  Rep.,  160. 

*  I  am  indebted  to  Professor  Smalley  of  Ann  Arbor,  certainly  the  best 
authority  among  economists,  for  many  citations  on  this  point;  as  well  as 
to  Professor  F.  H.  Dixon  for  suggestions.  Cf.  also  21  I.C.C.  Rep.,  415; 
Annual  Report  I.C.C,  1911,  p.  34;  and  the  Commerce  Court  opinion 
under  discussion.  Commissioner  Harlan  in  his  dissent  in  the  Shreveport 
case  asserts  a  clearer  right  over  minimum  than  over  maximum  rates  as 
against  state  authority.     23  I.C.C.  Rep.,  54. 

VOL.  I — 10 


626  RAILROADS 

fix  such  a  lower  limit,  below  which  compensation  may  not  be 
had.  And  yet  many  cases  show  that  it  is  absolutely  necessary, 
to  the  end  that  justice  may  be  done.  Or  may  the  unconstitu- 
tionality of  fixing  minimum  rates  depend  upon  the  fact  that,  if 
thus  prescribed  along  with  maximum  rates,  it  will  amount, 
practically,  to  determination  of  the  absolute  rate  —  the  bogey 
which  the  carriers  seem  most  of  all  to  hold  in  dread?  Interest- 
ing and  inviting  possibilities  of  judicial  interpretation  are  in- 
deed suggested  along  this  line,  were  there  opportunity  to  pursue 
them  further. 


CHAPTER  XX 

THE     CONFLICT    OF    FEDERAL    AND    STATE    AUTHORITY; 
OPEN   QUESTIONS 

History  of  state  railroad  commissions,  627.  —  The  legislative  unrest  since 
1900,  628.  —  New  commissions  and  special  laws,  629.  —  The  situation 
critical,  630.  —  Particular  conflicts  illustrated,  631.  —  The  clash  in 
1907,  632.  —  Missouri  experience,  633. — The  Minnesota  case,  634. 
—  The  Governors  join  issue,  634.  —  The  Shreveport  case,  635. 

Control  of  coastwise  steamship  Unes,  638.  —  Panama  Canal  legislation, 
641.  —  The  probable  effect  of  the  canal  upon  the  raikoads,  especially 
the  transcontinental  lines,  643. 

Historically,  the  attempt  of  the  separate  American  states 
to  control  railways  began  with  a  law  after  the  English  model 
in  New  Hampshire  establishing  a  commission  in  1844.^  Three 
other  New  England  states  then  followed  suit  prior  to  the 
Civil  War.^  But  these  early  experiments  were  mainly  con- 
cerned with  matters  of  safety  rather  than  of  rates.  The  first 
real  step  was  taken  by  Massachusetts  in  1869.  The  Railroad 
Commission  created  in  that  year  has  served  ever  since  as  a 
model  of  the  so-called  "weak"  or  "advisory"  type  of  regula- 
tion. Others  of  this  sort  were  more  common  in  the  eastern 
states.     Such    commissions,    in   Massachusetts    for    example, 

1  On  state  commissions  and  the  conflict  with  the  Federal  government, 
consult  as  follows: 

1900.   Hendrick,  F.,  Railway  Control  by  Commissions. 

1900.    McLean,  S.  J.,  Economic  Journal,  pp.  22-42. 

1903.    Meyer,  B.  H.,  Railway  Legislation  in  the  United  States. 

1903.  Railways  in  the  United  States  in  1902,  part  II.  United  States 
Interstate  Commerce  Commission. 

190.5.   Dixon,  F.  H.     Political  Science  Quarterly,  XX,  pp.  612-624. 

1908.    Huebner,  G.  G.     Annals  Amer.  Acad.  Pol.  Sci.,  pp.  138-155. 

In  a  List  of  References  on  Railways,  published  by  the  Congressional 
Library,  1907,  special  articles  on  experience  by  states,  such  as  Dixon  on 
Nebraska,  Meyer  on  Wisconsin,  Million  on  Missouri,  etc.,  will  be  found 
under  the  names  of  states.  Even  more  comprehensive  is  the  collective 
catalogue  prepared  by  the  Bureau  of  Railway  Economics,  Chicago,  1912. 


628  RAILROADS 

rely  mainly  upon  public  opinion  for  the  enforcement  of  their 
decisions.  They  possess  very  limited  authority  over  rates, 
although  they  are  empowered  to  recommend  such  changes  as 
may  be  deemed  advisable.  Back  of  this  authority,  of  course, 
lies  the  legislative  power  of  the  General  Court,  invoked  on 
special  occasions.  But,  in  general,  the  activities  of  the  Massa- 
chusetts type  of  commission  have  been  mainly  confined  to 
supervision,  either  of  construction  or  of  capitalization.  ^  New 
York  and  several  other  states  conformed  in  the  main  to  this 
type,  although  none  of  them  had  any  authority  over  matters 
of  finance.  A  second  variety  of  the  older  railroad  commissions 
dates  from  the  period  of  the  Granger  Movement  in  the  West. 
Maximum  rate  laws  were  passed  by  a  number  of  common- 
wealths in  the  seventies,  notably  Illinois,  Minnesota,  Iowa,  and 
Wisconsin.  The  outcome  of  this  legislation  was  the  decision  of 
the  Supreme  Court  of  the  United  States,  elsewhere  discussed,^ 
holding  that  state  legislatures  had  the  power  to  fix  rates.  The 
so-called  "strong"  commissions  had  their  rise  in  connection 
with  these  events.  Railway  boards  of  this  second  type  exercised 
control  over  rates  ia  two  ways;  namely,  by  means  of  the  promul- 
gation of  freight  classifications  and  the  prescription  of  maximum 
distance  tariffs.  For  the  purposes  of  such  regulation  most  of 
the  western  states  grouped  the  carriers  according  to  their 
earning  capacity,  with  a  different  schedule  in  each  case.  In 
certain  of  the  southern  states  these  older  commissions  adopted 
even  more  drastic  policies  which  brought  about  prolonged 
litigation.  The  peculiar  case  of  Texas,  adding  financial  legis- 
lation to  the  direct  prescription  of  rate  schedules,  has  been 
discussed  by  itself.^ 

A  new  chapter  in  railroad  regulation  by  the  separate  states 
dates  from  the  general  public  unrest  and  Congressional  activity 
of  the  Roosevelt  period.     An  almost  frenzied  activity  after 

1  Financial  regulation  will  be  discussed  in  vol.  II. 

2  P.  4.52,  supra.     Also  chaps.  XXIII  et  scq.  in  our  Railway  Problems. 
^  Vol  II,  in  connection  with  capitalization  and  stock-watering. 


FEDERAL   v.    STATE  AUTHORITY  629 

t 

1900  culminated  in  1907  in  a  legislative  wave  which  swept 
over  the  entire  country.  No  less  than  fifteen  new  or  remodelled 
commissions  were  created  in  the  two  years  1905-1907,  bringing 
the  total  number  by  1908  to  thirty-nine.  Practically  all  of 
these  were  of  the  so-called  "strong"  t^^je;  that  is  to  say, 
possessing  the  most  extensive  powers  over  all  matters  of  rate 
operation  and  in  many  cases  of  finance  as  well.  The  most 
notable  of  these,  of  course,  were  the  so-called  Public  Utility 
Commissions  of  Wisconsin  (1905)  and  New  York  (1907). 
The  subjugation  of  the  formerly  dominant  railway  interests  in 
New  Jersey  and  Pennsylvania  was  also  highly  significant.^ 
The  movement  even  invaded  the  New  England  States,  —  so 
long  a  sanctuary  of  the  "weak"  or  advisory  commission. 
Vermont  and  New  Hampshire  set  up  powerful  boards,  and 
Massachusetts,  in  1913,  amplified  the  powers  of  its  com- 
mission in  harmony  with  the  general  movement.  Several 
features  of  this  new  lot  of  state  commissions  contrast  markedly 
with  even  the  old-fashioned  "strong"  tj^pe.  Many  of  them 
permit  the  fixing  of  absolute  rates.  The  majority  now  provide 
for  appointment  rather  than  election  of  the  commissioners; 
and  also  by  salary  and  in  other  ways  enhance  the  dignity  of 
the  office.  This  operates  naturally  to  lift  these  boards  out  of 
a  semi-pohtical  atmosphere  formerly  too  characteristic  in 
many  cases;  and  to  bring  them  more  to  a  par  with  the  state 
courts. 

The  "Wisconsin  Idea,"  achieving  its  full  flower  under  the 
remarkable  leadership  of  Governor  La  Follette  in  1905,  ably 
seconded  by  a  number  of  prominent  University  of  Wisconsin 
men,  notably  Hon.  B.  H.  Meyer,  now  a  member  of  the  Inter- 
state Commerce  Commission,  most  completely  realizes  the 
progressive  policy  of  sane  state  regulation. ^    The  principle  is 

1  On  the  new  Pennsylvania  commission  consult  the  Quarterly  Journal 
of  Economics,  August,  1912. 

"  "The  Wisconsin  Idea,"  by  Charles  McCarthy,  described  by  Van  Hise 
in  "Concentration  and  Control,"  1912,  p.  236. 


630  RAILROADS 

laid  down  ''that  it  was  as  much  the  duty  of  the  state  to  furnish 
transportation  facihties  as  it  ever  had  been  to  make  roads  or 
build  bridges;  and  that  if  the  function  was  delegated  to  any 
one,  it  was  the  duty  of  the  state  to  regulate  it  so  that  the  agent 
should  be  required  to  furnish  adequate  service,  reasonable 
rates,  and  practise  no  discrimination."  And,  it  is  added,  that 
this  procedure  should  be  "so  simple  that  a  man  can  write  his 
complaint  on  the  back  of  a  postal  card,  and  if  it  is  a  just  one, 
the  state  will  take  it  up  for  him."  The  three  fundamental 
principles  of  the  Wisconsin  programme,  now  happily  incorpo- 
rated in  the  Federal  law,  were  full  authority  over  future  rates; 
secured  without  expense  to  the  complainant;  and  with  the 
burden  of  proof  laid  upon  the  railroad  in  cases  of  appeal.  In 
short,  the  Wisconsin  plan  provided  for  thoroughgoing  adminis- 
trative control,  that  is  to  say,  with  strict  limitation  of  judicial 
review  to  the  determination  of  points  at  law.  The  issues  were 
in  no  wise  different  from  those  already  discussed  heretofore 
in  connection  with  the  development  of  the  recent  Federal 
policy;  except  possibly  in  respect  of  the  persistency  of  opposi- 
tion, which  has  had  to  be  overcome  more  gradually  in  the 
Senate  of  the  United  States,  —  the  natural  stronghold  of 
corporate  influence. 

The  creation  of  powerful  state  commissions  since  1905  has, 
oddly  enough,  been  accompanied  by  a  great  activity  of  the 
state  govermnents  in  the  enactment  of  statutes  aiming  inde- 
pendently to  regulate  common  carriers.  Laws  of  this  class 
are  not  new.  As  far  back  as  1890  there  were  twenty-two  maxi- 
mum rate  and  fare  statutes.  A  period  of  quiescence,  marked 
by  only  four  such  laws  in  twelve  years,  was  followed  by  the 
passage  within  five  years  to  1907  of  no  less  than  twenty-two 
maximum  fare  laws  and  nine  maximum  rate  schedules.^  To 
these  may  be  added  a  large  grist  of  statutes  dealing  with  almost 
every  detail  of  operation  or  service.  Demurrage,  provision 
for  terminals,  train  service  and  connections,  distribution  of 
'  Huebner,  op.  cit.,  p.  147  has  carefully  tabulated  all  these  laws. 


FEDERAL   v.    STATE  AUTHORITY  631 

cars,  industrial  and  spur  tracks,  and  hours  of  labor,  may  be 
cited  among  a  host  of  others. 

The  activities  of  state  governments  in  recent  years  in  the 
creation  of  powerful  railroad  commissions,  with  the  added  grist 
of  drastic  independent  statutes,  have  greatly  emphasized  the 
eternal  conflict  of  authority  between  the  state  and  Federal 
governments,  as  well  as  between  the  different  states.  Problems 
akin  to  those  raised  by  the  diversity  of  our  laws  respecting 
marriage,  labor,  and  bankruptcy  have  been  forced  upon  the 
attention  of  Congress  and  the  Federal  courts.  Reasonable 
cooperation  might  be  counted  upon  to  accomplish  something; 
but  the  course  of  events  since  1905  points  to  the  necessity  of  a 
final  settlement  of  this  important  issue  as  far  as  common 
carriers  are  concerned,  so  authoritatively  that  a  greater  measure 
of  political  and  industrial  peace  may  prevail  in  future.  The 
situation  respecting  railroads  was  well  described  by  Justice 
McKeima  of  the  United  States  Supreme  Court  in  an  opinion 
annulling  the  North  Carolina  law  requiring  railroads  to  receive 
goods  for  interstate  transj^ortation  whether  they  had  published 
rates  for  the  proposed  shipment  or  not;  —  "if  the  carrier  obeys 
the  state  law,  he  incurs  the  penalty  of  the  Federal  law;  if  he 
obeys  the  Federal  law,  he  insures  the  penalty  of  the  state  law. 
Manifestly,  one  authority  must  be  pararnount,  and  when  it 
speaks,  the  other  must  be  silent."  It  may  be  added  that  in 
this  recent  case,  following  the  inevitable  trend  of  events  it 
was  the  state  law  upon  which  the  penalty  of  silence  was 
visited. 

The  ultimate  ramifications  of  a  state  law  under  the  complex- 
ities of  modern  railway  rate  adjustment  and  operation  can 
never  be  foreseen.  It  is  not  simply  a  question  of  avoiding 
conflict  between  distance  tariffs  and  classifications.^     Often- 

^  The  effect  of  Missouri  distance  tariffs  upon  rates  over  a  large  part  of 
the  Middle  West  is  best  instanced  in  the  Missouri-Mississippi  rate  scheme. 
Cf.  p.  128,  supra,  and  especially  chap.  XX  in  our  Railway  Problems,  rev.  ed. 
Cf.  also  local  and  through  tariffs  at  p.  394,  supra ;  the  Wabash  decision, 
p.  451,  supra;  and  the  two-cent  fare  laws,  p.  429,  supra. 


632  RAILROADS 

times  the  most  modest  rules  and  regulations  may  lead  to  results 
affecting  commerce  over  a  wide  area.  The  great  increase  in 
large  cars  throughout  the  West,  by  contrast  with  other  parts 
of  the  country,  as  traceable  to  the  establishment  by  Missouri 
of  minimum  carloads,^  is  a  case  in  point.  We  have  also  already 
observed  how  the  revised  milk  laws  of  Massachusetts  opened 
up  an  issue  covering  all  of  New  England.^  And  then  there  are 
the  various  attempts  of  the  railroad  commissions,  notably 
Texas  ^  and  Minnesota,  to  set  up  schemes  of  rates  which  shall 
concentrate  the  distributive  business  of  the  community  in  local 
cities  as  against  the  competition  of  jobbers  at  a  distance.  The 
extreme  confusion  introduced  in  matters  of  classification  by  con- 
flicting authorities  has  already  reached  a  point  where  demand 
for  the  substitution  of  a  single  uniform  schedule  for  the  United 
States  has  become  wellnigh  irresistible.^  There  are  also  con- 
flicts respecting  laws  regulating  service,  illustrated  by  the  Su- 
preme Court  decision  in  1907,  holding  that  the  attempt  of  North 
Carolina  to  require  through  fast  mail  trains  to  stop  at  small 
way  stations,  was  unconstitutional;  ^  and  finally,  some  agree- 
ment as  to  division  of  accounts  between  interstate  and  intra- 
state business  will  at  once  be  recognized  as  an  essential  to  the 
determination  of  reasonable  rates  for  through  and  local  service 
respectively.®  From  every  side,  in  short,  the  need  of  a  clear 
separation  of  state  and  Federal  powers  is  becoming  more  and 
more  insistent. 

The  conflict  between  general  and  local  authority  came  to 
a  head  in  1907,  resulting  in  a  violent  clash  between  the  Federal 
and  state  courts.''  The  worst  complication  arose  in  the  South, 
particularly  in  North  Carolina  and  Alabama.     Certain  rail- 


»  P.  335,  supra.  2  P.  329,  supra. 

3  Cf.  p.  394,  supra,  the  Texarkana,  I.C.C.  case,  May,  1900;  and  11 
Idem,  ISO,  for  Arkansas.  Also  13  Ide7n,  48;  and  18  Idem,  415.  For  later 
cases,  22  Idem,  110;   and  23  Idem,  404  and  688. 

*  Cf.  p.  338,  supra.  »  207  U.  S.,  328.  «  P.  586,  supra. 

''  Economic  Bulletin,  of  the  Amer.  Econ.  Ass.,  I;  Annual  Rep.  I.C.C, 
1907,  p.  93;   and  Idem,  1908,  pp.  71  and  76. 


FEDERAL  v.    STATE  AUTHORITY       633 

roads  brought  suit  in  the  Federal  courts  to  annul  rates  fixed 
by  the  state  legislatures;  and  temporary  Federal  injunctions 
were  at  once  issued  suspending  the  statutes  until  determination 
of  their  constitutionality.  Popular  feeling  was  much  aroused, 
and  local  officials  sought  vigorously  to  defend  states'  rights. 
Ticket  agents  collecting  more  than  the  state-  prescribed  fare, 
were  condemned  to  the  chain  gang  and  the  president  of  the  rail- 
road company  was  arrested.  Federal  judges  promptly  released 
all  parties  by  writs  of  habeas  corpus.  A  truce  was  fuially  patched 
up,  pending  determination  of  the  matter  at  issue  by  the  Su- 
preme Court  of  the  United  States.  The  final  and  ine\ntable 
outcome,  of  course,  was  a  decision  by  this  tribunal,  upholding 
the  authority  of  the  general  government.^  Technically,  the 
question  in  these  cases  concerned  the  power  of  the  Federal 
courts  to  issue  temporary  injunctions  suspenduig  state  laws; 
or,  in  other  words,  raising  the  nice  distinction  as  to  whether 
a  suit  against  a  state  officer  was  a  suit  against  the  state  or  not. 
Various  other  legal  technicalities  were  involved  both  in  North 
Carolina  and  Alabama.  The  main  issue  has  been  dealt  with 
for  the  future  by  a  special  clause  of  the  Mann-Elkms  law  of 
1910.  This  provides  that  a  petition  for  an  injmiction  sus- 
pending a  state  law,  shall  be  heard  by  three  Federal  judges, 
one  at  least  of  a  superior  court.  Five  days'  notice  is  required; 
and  there  is  a  direct  appeal  to  the  Supreme  Court  of  the  United 
States.  But  an  mjunction,  thus  issued,  is  given  clear  prece- 
dence over  any  statute  regarding  common  carriers  emanating 
from  authority  of  an  individual  state. 

The  state  of  Missouri  has  had  a  tr>ang  experience.  This 
occurred  in  connection  with  a  statute  of  1907  reducing  passen- 
ger rates  from  three  to  two  cents  a  mile.  Federal  judges 
promptly  granted  injunctions  against  the  enforcement  of  this 
statute.  The  state's  Attorney-General  in  the  meantime  cited 
the  railroads  into  the  state  courts  to  show  cause  for  failing  to 
obey.  The  compromise  in  this  case  took  the  form  of  an  agree- 
1  209  U.  S.,  123,  205. 


634  RAILROADS 

ment  to  give  the  new  law  a  trial  of  several  months  in  order  to 
test  the  financial  effect  of  the  reduction  in  fares.     Then  fol- 
lowed an  interchange  of  injunctions,  quite  characteristic  of  the 
old  days  of  the  Erie  Railroad,  save  for  the  integrity  of  the  judges 
concerned.     To  this  there  then  succeeded  a  decision  by  the 
Federal  Circuit  Court  that  the  rates  were  confiscatory;    al- 
though for  some  reason  the  two-cent  fares  and  other  reduced 
charges  remained  practically  in  effect.     Controversies  similar 
to  this  have  arisen  since  1907  in  some  seven  different  states. 
Oregon  and  West  Virginia  took  issue  as  to  the  validity  of  two- 
cent  passenger  fare  laws.     In  the  latter  case,  the  state  supreme- 
court  held  that  the  statute  was  not  confiscatory.      In  Oregon 
the  lower  Federal  court  upheld  the  state  law.     The  contest 
from  Kentucky  involved  the  constitutionahty  of  a  state  rail- 
road  commission   act,   already   held   unconstitutional   in   the 
United    States    Circuit    Court.     The    Arkansas    appeal    had 
mainly  to  do  with  maximum  rate  laws  in  relation  to  physical 
valuation  of  property;    and  in  Ohio,  the  vahdity  of  a  state 
rate  on  coal  to  Lake  Erie  was  in  dispute.     The  railroad  con- 
tended that  the  traffic  was  interstate  commerce,  a  contention 
denied  by  the  state  authorities. ^     The  Minnesota  case,  —per- 
haps the  most  voluminous  in  its  record  of  all,  —  had  primarily 
to  do  with  the  confiscatory  nature  of  reductions  of  intrastate 
rates:    and  this  in  turn  hinged  upon  the  mode  of  separating 
accounts.2     A  distinct  affirmation  of  Federal  supremacy  has 
also  been  had  by  a  Circuit  Court  opinion  in  1911.     All  these 
cases  are  at  this  writing  (1912)  before  the  Supreme  Court  of 
the  United  States  for  decision.     The  main  issue  is  pooled  by 
agreement  between  the  governors  of  the  seven  commonwealths 
concerned.     The   outcome   camiot  fail   to   be   of  the   utmost 
importance,  —  far-reaching  in   its   effect   not   only   upon   the 

1  The  similar  controversy  in  Minnesota  regarding  iron  ore  shipments 
seems  to  have  been  settled  by  voluntary  abandonment  of  the  daim  to 
regulate  by  the  state  on  Nov.  20,  1911.     Cf.  Minn.  R.  R.  Com.,  Rep. 

2  Decision  reprinted  in  our  Railway  Problems,  rev.  ed.,  chap.  XXV. 
See  also  volume  II. 


FEDERAL  v.    STATE  AUTHORITY       635 

regulation  of  railways  but  throughout  the  entire  field  of  con- 
stitutional law.  Such  decisions  as  the  Supreme  Court  has 
already  rendered  in  connection  with  these  matters  having 
been  entirely  favorable  to  Federal  authority,  undoubtedly  in 
this  instance  mduced  the  joint  action  of  the  state  executives 
for  mutual  protection  and  support.  There  can  be  no  doubt 
that  a  sweeping  decision,  upholding  Federal  authority,  will 
go  far  to  solidify  control  by  the  Interstate  Commerce  Commis- 
sion. It  will  also  clear  the  air  and  greatly  simplify  the  problem 
of  operation  by  the  managements  of  the  railroads,  not  only  in 
these  seven  states  but  all  over  the  United  States  as  well. 

The  delicate  balance  between  state  and  Federal  authority 
over  commerce  is  also  in  a  way  to  be  tested  in  what  promises 
to  become  an  historic  case  before  the  Interstate  Commerce 
Commission,  —  historic  in  the  sense  that  its  final  adjudication 
by  the  Supreme  Court  of  the  United  States  will  add  a  positive 
contribution  to  the  body  of  our  fundamental  law.^  It  may 
best  be  understood  by  first  gaining  a  clear  idea  of  the  nature 
of  the  economic  grievance.  Shreveport,  Louisiana,  is  situated 
on  the  Red  river,  an  important  tributary  of  the  Mississippi, 
some  190  miles  distant  from  Dallas  and  231  miles  from  Hous- 
ton, —  both  of  the  latter  being  important  and  ambitious 
provincial  distributing  points  in  Texas.  Shreveport,  enjoy- 
ing the  benefits  of  water  competition,  —  probably  more  keen 
historically  than  at  present,  —  was  granted  correspondingly 
low  carload  rates  by  rail  on  merchandise  from  the  north  and 
east.  These  favorable  rates  were  not  extended  to  the  two 
Texas  cities,  inasmuch  as  water  competition  was  entirely  absent. 
Naturally,  therefore,  an  advantage  was  given  to  the  Louisiana 
city  in  competition  for  distributive  business  in  all  the  inter- 
mediate territory  and  even  over  in  the  Hinterland  in  Texas. 
In  pursuance  of  a  long-standing  policy  of  encouraging  the 
growiih  of  pro\dncial  jobbing  points  within  its  own  borders,^ 

1  Railroad  Commission  of  Louisiana,  etc.;  23  LC.C.  Rep.,  3L 
*  Cf.  p.  394,  supra. 


636  RAILROADS 

the  Texas  Railroad  Commission  proceeded  to  overcome  this 
disability  by  prescribing  relatively  low  rates  out  of  Dallas  and 
Houston  as  compared  with  the  rates  from  Shreveport  to  the 
same  points.  It  seems  even  to  have  gone  further  and  to  have 
interposed  positive  barriers  against  the  competition  of  Shreve- 
port jobbers  in  Texas  territory,  by  somewhat  more  than 
compensating  for  the  low  water  rates  at  Shreveport.  The  dis- 
parity thus  set  up  may  be  best  illustrated  by  the  following 
table  of  charges  for  approximately  equal  distances. 


Rates  in  cents  per  hundredweight 


Class 
1  E 


From  Dallas  to  Big  Sandy,  Texas 101  miles  44  13 

From  Shreveport,  La.,  to  Crow,  Texas  .  100  miles  95  18 

From  Houston  to  Renova,  Texas    103  miles  45  14 

From  Shreveport,  La.,  to  Angeline,  Texas  104  miles  68  15 

Stated  in  another  way,  sixty  cents  would  carry  one  hundred 
pounds  of  first-class  traffic  some  160  miles  out  of  Dallas  into 
eastern  Texas;  while  an  equal  rate  out  of  Shreveport  into  the 
same  Texas  territory,  west  bound,  was  exacted  for  a  haul  of 
only  fifty-five  miles,  —  about  one-third  the  distance. 

The  Commission  decided  upon  the  evidence  by  a  bare 
majority  that  these  Texas  tariffs  were  unduly  preferential; 
and  ordered  them  to  be  so  readjusted  that  the  charges  should 
be  the  same  for  equal  distances  from  all  three  cities  regardless 
of  state  lines.  Concerning  the  minor  point  that  it  was  lawful 
for  a  carrier  to  equalize  conditions  as  between  two  competing 
places  by  imposing  high  local  rates  upon  one  point  in  order  to 
offset  the  advantages  as  to  inbound  through  rates  enjoyed  by 
the  other,  the  Commission  merely  reaffirmed  its  belief  that 
natural  advantages  of  geographical  location  could  not  lawfully 
thus  be  nullified.^ 

The  opinion  rendered  in  this  case  is  remarkable,  less  in  its 
economic  aspects,  concerning  which  there  seems  not  to  have 

1  Ibid.,  p.  34.  A  number  of  other  cases  are  cited  and  compared  by 
Hammond,  Rate  Theories,  etc.,  1911,  p.  82  et  seq. 


FEDERAL  v.    STATE  AUTHORITY       637 

been  any  great  diversity  of  view,  than  as  regards  the  divergent 
views  expressed  as  to  the  legal  authority  of  the  Commission 
to  interfere  in  the  matter  at  all.  Was  midue  preference  and 
advantage  in  the  eyes  of  the  law,  —  the  decision  being  rendered 
under  the  third  section  of  the  act,  —  created  by  the  set  of  cir- 
cumstances above  described?  At  this  point  the  Commission 
divided,  with  no  fewer  than  two  concurring  and  two  dissenting 
opinions  added  to  the  majority  \'iew.  According  to  this  last, 
not  only  was  the  power  of  Congress  to  legislate  in  such  matters 
paramount,  but  it  was  also  held  that  this  supreme  power  to 
put  an  end  to  all  forms  of  local  discrimination,  —  even  those 
created  by  the  act  of  state  authorities,  —  had  been  delegated 
by  Congress  to  the  Interstate  Commerce  Commission.  And 
in  such  instances,  wherein  conflict  arose  between  Federal 
and  state  authority,  the  only  rational  and  possible  course,  it 
was  held,  was  for  the  national  government  through  its  ad- 
ministrative agent  "to  assume  its  constitutional  right  to 
lead." 

The  three  separate  dissenting  opinions  are  of  interest  as 
expressing  the  need  of  a  definitive  pronouncement  upon  this 
great  question  by  the  Supreme  Court  of  the  United  States. 
Not  alone  as  to  whether  Congress  intended  to  delegate  authority 
to  the  Commission  to  settle  such  issues,  but  even  the  right  of 
Congress  itself  to  pass  upon  them  under  the  Federal  constitu- 
tion, were  called  in  question  by  the  members  of  this  adminis- 
trative board.  Two  dissenters  were  content  to  submit  the 
matter  to  "the  august  tribunal  of  the  people  which  is  con- 
tinually sitting"  to  choose  between  submitting  to  such  griev- 
ances as  an  alternative  for  virtually  legislating  state  authority 
out  of  existence.  The  third  dissentient  view  was  more  thor- 
oughgoing. It  not  only  discovered,  legally  speaking,  no  undue 
discrimination  in  the  circumstances.  It  pointed  out  that  on 
reducing  the  Shreveport  local  tariff  "we  fix  interstate  rates 
by  the  Texas  yardstick,"  whereby  "the  national  government 
therefore  leads  by  following. ^^     It  concluded  by  affirming  that 


638  RAILROADS 

the  Commission  "should  confine  itself  within  the  four  corners 
of  the  law  of  its  creation,  usurping  neither  the  legislative 
function  of  the  Congress  nor  the  judicial  power  of  the  courts." 
From  all  of  which  it  is  clear,  first,  that  the  Supreme  Court  of 
the  United  States,  having  once  clearly  defined  the  jurisdiction 
of  the  Federal  government  in  such  matters,  it  may,  in  the 
second  place,  well  be  that  further  amendment  of  the  Act  to 
Regulate  Commerce  will  be  in  order. 

In  conclusion,  it  is  pertinent,  apropos  of  the  approaching 
completion  of  the  Panama  Canal  and  the  intensified  interest 
in  a  more  complete  utilization  of  our  internal  waterways,  to 
discuss  briefly  the  relation  between  railroads  and  carriers  by 
boat.  The  most  stupendous  canal  projects  are  being  brought 
forward,  in  the  expectation  that  they  will  not  only  provide 
for  a  vast  amount  of  low-grade  traffic  in  themselves,  but  also 
that  through  the  forces  of  competition  they  will  bring  about 
a  substantial  lowering  of  charges  by  railway.  The  most  am- 
bitious of  these  enterprises  is  the  plan  for  a  "Lakes  to  the 
Gulf"  ship  canal,  even  comprehending  the  dream  of  a  twenty- 
four  foot  channel  down  the  course  of  the  Mississippi.  Another 
and  more  modest  proposition,  probably  practicable,  is  the  con- 
struction of  a  canal  from  Lake  Erie  to  the  Ohio  river.  Alto- 
gether it  has  been  credibly  estimated  ^  that  the  entire  scheme 
for  internal  improvements  of  this  sort  would  call  for  an  outlay 
of  not  less  than  $2,000,000,000.  Before  engaging  in  any 
experiments  upon  such  a  magnificent  scale,  it  is  certainly 
proper  to  enquire  whether  the  results  will  be  in  any  way  com- 
mensurate with  their  cost. 

The  cost  of  water  carriage,  like  that  of  transportation  by 
rail,  should  at  the  outset  be  divided  into  two  distinct  parts; 
one  of  which  varies  more  or  less  in  proportion  to  the  volume  of 
traffic,  while  the  other,  concerned  with  fixed  charges  on  the 

'  The  most  careful  examination  of  this  subject  is  in  H.  G.  Moulton's 
Waterways  Versus  Railways,  1912. 


CONTROL  OF  WATER  CARRIERS  639 

investment,  maintenance  and  depreciation,  is  constant.  The 
latter  in  other  words  bears  little  or  no  relation  to  the  tonnage 
transported.^  A  careful  distinction  between  these  two  great 
groups  of  expenditures  is  of  fundamental  importance  in  any 
comparison  between  rail  and  water  carriage.  The  failure  to  so 
distinguish  is  responsible  for  much  of  the  fallacious  reasoning 
upon  the  subject  both  in  and  outside  of  the  halls  of  Congress. 
It  is  indisputable  that  mere  operating  exj^enses  are  verj-  much 
less  by  boat  than  by  rail,  especially  when  the  economies  of 
large  craft  can  be  had.  The  phenomenal  development  of 
commerce  upon  the  Great  Lakes,  especially  for  the  carriage  of 
iron  ore,  coal  and  lumber,  is  due  to  this  fact.^  But,  on  the 
other  hand,  it  is  equally  clear  that  the  second  great  group  of 
expenditures,  particularly  the  fixed  charges  due  to  the  enormous 
first  cost  of  construction,  are  very  much  greater  by  artificial 
waterways  than  by  rail.  The  balance  between  low  operating 
costs  and  heavy  fixed  charges,  of  course,  will  be  struck  accord- 
ing to  the  nature  of  the  particular  enterprise.  And  canals, 
being  entirely  artificial,  offer  the  least  advantageous  oppor- 
tunity for  realization  of  the  economies  incident  to  movement 
of  freight  by  water.^ 

Improved  riverways  are  economical  by  comparison  with 
canals  just  in  proportion  to  their  lessened  first  cost;  but,  on 
the  other  hand,  mere  movement  expenses,  maintenance  and 
depreciation  are  apt  to  be  higher  according  to  the  strength  of 
the  current.  In  each  instance  everj'ihing  depends  upon  first 
cost  and  the  consequent  burden  of  fLxed  charges.  This  point 
is  almost  totally  neglected  in  popular  discussion  of  the  subject. 
Internal  waterways  being,  wdthout  exception,  pubUc  enter- 
prises, the  burden  of  interest  charges  is  generally  put  aside 
as  of  no  consequence.     Naturally  therefore,  these  being  elimi- 

*  CJ.  p.  45,  supra. 

2  Cf.  the  Final  Report  of  the  U.  S.  Industrial  Commission,  1901,  vol. 
XIX. 

^  Cf.  the  data  published  by  the  Bureau  of  Railway  Economics,  in  Bul- 
letin 21,  1911,  on  the  relative  cost  of  transportation  upon  the  Erie  CanaJ. 


640  RAILROADS 

nated,  the  apparent  economy  of  carriage  by  water  is  mirrored 
forth  with  great  effect.^ 

The  experience  of  Germany,  so  often  adduced  in  favor  of 
water  carriage,  when  examined  in  the  light  of  the  foregoing 
economic  principles,  is  peculiarly  illuminating.  Much  traffic, 
to  be  sure,  moves  apparently  with  greater  cheapness  than  by 
rail  upon  both  canals  and  rivers.  Considering  the  tariffs 
which  are  based  upon  movement  expenses  alone,  excluding, 
that  is  to  say,  any  adequate  return  upon  the  total  investment, 
such  methods  of  transportation  seem  very  economical  and 
highly  effective.  But  when  total  costs,  rather  than  merely 
partial  ones,  are  considered,  the  picture  is  completely  reversed. 
The  Dortmund-Ems  canal,  for  instance,  certainly  the  most 
important  in  Germany,  represents  an  investment  per  mile 
fifty  per  cent,  greater  than  the  average  for  German  railways. ^ 
For  the  single  year  1905,  the  contributions  from  the  states  and 
cities' interested,  amounted  to  a  subsidy  of  about  $900,000. 
This  financial  burden,  if  distributed  over  the  total  tonnage, 
would  make  the  entire  cost  of  operation  nearly  one-fourth 
greater  than  the  average  by  rail. 

Rivers,  as  we  have  seen,  possess  certain  advantages  over 
canals,  mainly  in  proportion  to  the  lessened  first  cost  of  their 
improvement.  The  Rhine  is  often  cited  as  an  example  of  what 
the  Mississippi  should  be  as  a  great  chaimel  of  commerce;  but 
again  that  fatal  objection  of  the  first  cost  and,  in  the  case  of 
the  Mississippi,  of  maintenance  must  always  be  kept  in  mind. 
The  Rhine  like  the  Hudson  river  or  the  St.  Lawrence  is,  indeed, 
naturally  adapted  for  carriage  by  water.  Its  firm  banks, 
gentle  gradient  and  constancy  of  level,  are  all  elements  in  its 
favor.  But  it  is  certainly  futile  to  anticipate  similar  results 
on  the  Mississippi  or  its  tributaries,  —  huge  and  inconstant 
leviathans  as  they  are,  traversing  a  great  alluvial  plain  devoid 
of  solid  foundations  of  any  sort.     The  fact  that  today  with  a 

^  Cf.  p.  386,  supra,  on  competition  by  river  in  the  South. 
2  Cf.  Moulton,  op.  cit. 


CONTROL  OF  WATER  CARRIERS       641 

nine  foot  channel,  Pittsburg  makes  no  use  of  the  Ohio  river 
for  its  shipments  of  iron  and  steel,  but  sends  them  to  the  Pacific 
coast  by  way  of  New  York,  certainly  does  not  augur  well  for 
the  success  of  even  an  enlarged  riverway  in  future,  except 
possibly  as  to  coal.  Of  course,  if  the  government  is  to  write 
off  all  the  original  investment,  shifting  the  incidence  to  the 
general  taxpayers  of  the  country,  that  is  a  different  matter. 
But  unless  the  state  thus  chooses  to  subsidize  the  enterprise 
entirely,  the  total  cost  of  transportation  by  rail  will  continue 
to  be  in  future  as  it  has  been  in  the  past,  substantially  lower 
than  by  the  older  and  now  antiquated  methods  of  transporta- 
tion. If  the  end  in  view  be  the  attainment  of  the  lowest  possible 
rates,  why  not  subsidize  the  railroads  directly  by  this  same 
amount?  or  even  buy  them  up  and  operate  them  for  cost? 
The  expense  to  the  taxpayers  would  be  no  more;  and  this 
plan  would  unquestionably  give  far  better  results.  Even  the 
electrically-towed  canal  boat  is  not  to  be  compared  for  efficiency 
in  reaching  all  parts  of  the  country  without  transhipment, 
with  giant  locomotives,  low  grades,  heavy  rails  and  large  train 
loads. 

The  ownership  or  control  of  water  carriers  by  railroads 
constitutes  a  troublesome  feature  of  present  day  conditions. 
Peculiar  prominence,  legislatively  speaking,  was  given  to  it 
because  of  the  attempt  in  1912  to  combine  legislation  dealing 
with  this  possible  evil  with  the  matter  of  Panama  Canal  tolls 
and  regulations.  Such  control  of  water  lines  in  competition 
with  railways  is  matter  of  public  record. ^  Much  of  the  coast- 
wise traffic  is  thus  tied  up.  The  Long  Island  sound  service 
of  the  New  Haven  system,  the  Old  Dominion  Company,  jointly 
owned  by  eastern  railroads,  and  the  Morgan  Line  and  Pacific 
Mail  Company,  both  parts  of  the  Southern  Pacific  system,  are 
notable  instances.     The  same  thing  is  true   upon  the   Great 

1  Cf.  pp.  386,  590  and  612,  su^ra.  Data  will  be  found  in  the  U.  S. 
Industrial  Commission  Report,  1900-1901,  and  the  Senate  (Elkins)  Com- 
mittee, 1905. 

VOL.  I — 41 


642  RAILROADS 

Lakes,  where  a  practical  monopoly  of  eastbound  transporta- 
tion has  been  long  held  by  the  trunk  lines.  By  refusal  to  grant 
through  routes  and  joint  rates  to  the  Lake  lines  at  Buffalo, 
these  railroads  have  practically  throttled  the  independent 
water  service.'  Even  on  the  lesser  rivers  this  phenomenon  of 
neutralization  of  water  competition  occurs.  Oftentimes  where 
the  bulk  of  the  tonnage,  as  in  transcontinental  business,  moves 
by  rail,  the  water  lines  simply  follow  the  railroads  as  to  rates 
with  a  modest  differential  dependent  upon  circumstances.  But 
the  fact  of  practical  elimination  of  competition  by  boat  line 
is  well  recognized. 

The  concrete  shape  in  which  this  matter  arose  in  Congress 
was  in  the  form  of  amendments  to  the  Panama  Canal  law  of 
1912,  In  the  House  a  bill  providing  for  free  passage  of  all 
American  coastwise  vessels  was  passed  by  a  vote  of  206  to  61, 
this  measure  at  the  same  time  prohibiting  all  railroads  from 
owning  stock  in  or  otherwise  controlling  directly  or  indirectly, 
any  competing  steamship  lines.  The  overwhelming  non- 
partisan majority  is  significant  of  public  sentiment  on  the 
question.  The  Senate  took  a  less  radical  stand  in  limiting  the 
prohibition  of  railroad  ownership  to  vessels  making  use  of 
the  Panama  Canal.  After  prolonged  discussion  in  the  con- 
ference committee,  the  more  drastic  measure  was,  fortunately, 
eliminated. 

From  several  points  of  view  absolute  prohibition  of  finan- 
cial relationship  between  railway  and  water  carriers  seems 
unwise.  A  practical  objection  is  that  it  may  seriously  handicap 
American  roads  in  competition  with  Canadian  carriers.  The 
Grand  Trunk,  for  example,  reaching  tidewater  on  Long  Island 
sound  might  lawfully  operate  a  boat  line  extending  its  service 
into  New  York;  whereas  the  New  Haven  Railroad  would  be 
forced  to  dispose  of  its  water  lines  to  the  same  point,  because 

'  The  so-called  Flour  City  case,  recently  decided  in  1912  by  the  I.C.C. 
(not  yet  reported),  held  it  to  be  the  duty  of  these  railroads  to  provide 
facilities  for  the  handUng  of  flour  on  through  shipments  of  this  sort. 


THE  PANAMA  CANAL  643 

they  were  in  competition  with  its  railroad  service.  And  it  is 
indisputable  that  similar  injustice  to  American  railroads  might 
elsewhere  be  brought  about.  Moreover,  the  undoubted  evil 
of  water  competition  thus  neutralized  by  railroads,  might  be 
remedied  in  other  ways.  One  of  these,  embodied  in  recom- 
mendations of  the  Port  Directors  of  Boston  in  1912,  opposing 
the  more  drastic  legislation  above  mentioned,  is  the  prevention 
of  monopoly  through  pubhc  ownership  or  control  of  docks 
and  wharfs.  For  railway  OA\mership  or  lease  of  these,  as  at 
Philadelphia,  San  Francisco,  Boston  and  elsewhere,  is  one  of 
the  easiest  methods  of  preventing  water  competition.  The 
water  lines  find  it  physically  impossible  to  secure  suitable 
terminals.  And  then,  finally,  there  is  always  the  possibility 
under  the  now  amphfied  Interstate  Commerce  law,  of  enforcing 
both  reasonable  rates  and  facilities  for  through  shipments, 
part  rail  and  part  water,  as  exemphfied  in  the  Flour  City  case 
above  mentioned.  It  is  not  improbable  that  further  ampli- 
fication of  the  law,  as  recommended  by  the  National  Water- 
ways Commission  in  1912,  may  be  necessary.  Probably,  in 
the  light  of  bitter  Southern  Pacific  experience,  it  was  wise  to 
restrict  Panama  Canal  traffic  to  water  lines  not  mider  railroad 
control.  But  any  attempt  to  go  farther  and  absolutely  to 
divorce  rail  and  water  lines  A\dthout  pro\'ision,  even,  for  the 
approval  of  the  Interstate  Commerce  Commission  in  excep- 
tional cases,  might  be  productive  of  great  harm  both  to  the 
railroads  and  the  pubHc. 

What  will  be  the  probable  effect  of  the  opening  of  the 
Panama  Canal  upon  the  railroads  of  the  United  States?  One 
must  consider  the  nature  and  volume  of  transcontinental 
traffic.  The  most  important  fact  is  that  nearly  nine-tenths 
of  all  transcontinental  business  at  the  present  time  moves  by 
rail.^    The  toimage  by  vessel  west  bound  either  around  Cape 

1  An  excellent  review  of  the  situation  in  Railwmj  Age  Gazette,  LIII, 
pp.  199  and  249. 


644  RAILROADS 

Horn  or  by  the  Isthmian  routes  has,  to  be  sure,  doubled  within 
five  years  to  1911.  But  by  far  the  larger  proportion  of  the 
business  moves  by  railroad  direct.  Secondly,  it  is  important 
to  note  that  a  large  part  of  transcontinental  traffic  consists  of 
an  exchange  of  commodities  between  the  Middle  West  and  the 
Pacific  coast.  Over  one-half  of  the  rail  shipments  west  bound 
to  Pacific  terminals  comes  from  west  of  Chicago.  Less  than 
one-quarter  of  the  through  traffic  of  one  of  the  principal  trans- 
continental roads  originated  at  Atlantic  coast  points.  And, 
inasmuch  as  water  competition  is  still  mainly  confined  to 
eastern  seaboard  territory,  the  diversion  of  this  middle  western 
business  from  the  rail  routes  will  not  be  disastrous  in  amount. 
In  the  opposite  direction  probably  an  even  higher  proportion 
of  business  is  carried  by  rail,  the  principal  reason  being  that 
much  of  the  bulky  freight  of  the  Pacific  slope,— lumber  for 
example, —is  consumed  throughout  the  treeless  Mississippi 
valley.  None  of  this  traffic  naturally  ever  moves  by  water.  It 
is  apparent,  therefore,  that  the  effect  of  opening  the  Panama 
Canal,  although  great,  will  be  for  the  most  part  locahzed  as  to 

results. 

Specifically  stated,  four  distinct  changes  seem  likely  to  be 
brought  about  in  the  transcontinental  situation.  The  first 
will  probably  be  a  considerable  stimulation  to  the  merchants 
and  cities  along  the  Atlantic  seaboard  throughout  a  zone  ex- 
tending inland,  perhaps,  as  far  as  Cleveland  and  Pittsburg. 
A  substantial  drop  in  steamship  rates  will  be  followed,  of  course, 
by  a  corresponding  reduction  in  through  rates  to  the  Pacific 
coast.  But,  on  the  other  hand,  it  must  be  borne  in  mind  that 
at  best  this  tonnage  is  even  today  relatively  unimportant  to 
the  transcontinental  railroads.  More  than  two-thirds  of  their 
through  traffic,  as  we  have  just  seen,  now  comes  from  the 
Middle  West.  These  railways  will  probably  prefer  to  lose  a 
portion  of  this  Atlantic  seaboard  business  rather  than  to  reduce 
their  rates  upon  perhaps  four-fifths  of  the  other  traffic,  as  they* 
would  otherwise  have  to  do  under  the  present  system  of  postage 


THE  PANAMA  CANAL  645 

stamp  rates,  from  the  Atlantic  seaboard  to  the  west  of  the 
Missouri  river. ^  The  eastern  trunk  lines,  moreover,  may 
probably  be  relied  upon  to  extend  the  low  seaboard  rates  some- 
what farther  inland  than  at  present,  rather  than  to  divide  low 
or  even  lower  through  all-rail  rates  from  the  Atlantic  to  the 
Pacific. 

Next  to  the  Atlantic  seaboard  territory,  the  so-called  Inter- 
mountain  or  Rocky  mountain  region,  may  be  expected  to 
benefit  substantially  from  the  opening  of  the  canal.  It  will 
surely  get  lower  direct  rates  than  at  present  on  all  its  supplies 
from  the  East.  Atlantic  seaboard  cities  will  doubtless  also 
seek  to  regain  some  of  the  business  throughout  this  region, 
which  has  been  lost  to  them  because  of  the  growth  of  manu- 
factures in  the  Middle  West.  The  transcontinental  railroads 
will  seek  to  protect  their  clients  in  St.  Louis  and  Chicago  as 
against  the  merchants  in  New  York  and  Boston,  who  gain  an 
entrance  to  Denver  and  Spokane  through  the  backdoor,  so  to 
say.  Not  only  will  lower  rates  prevail,  therefore,  but  there 
will  also  probably  be  a  larger  proportion  of  supplies  for  these 
mountain  states  drawn  directly  from  the  eastern  seaboard. 

The  foregoing  prognostication,  at  first  glance,  seems  to 
indicate  that  the  Middle  West  is  likely  to  profit  less  by  the 
opening  of  this  great  waterway  than  other  parts  of  the  country. 
But  it  should  be  borne  in  mind  that  their  hold  upon  west  coast 
trade  is  now  most  firmly  established.  A  part,  but  certainly 
only  a  part,  of  Pacific  terminal  business  may  be  lost,  but  this 
will  be  more  than  offset  by  the  growth  of  intercourse  with  the 
intermountain  states.  Surely  the  transcontinental  railroads 
west  from  St.  Paul,  Chicago,  and  St.  Louis  may  be  relied  upon 
to  protect  the  direct  exchange  of  goods  of  their  constituents  with 
the  intermountain  communities.  Transcontinental  railway 
rates  will,  of  course,  be  lowered  somewhat.  The  railways  will, 
however,  probably  prefer  to  surrender  the  lesser  portion  of 
their  present  traffic  in  order  to  maintain  profitable  charges 
^  CJ.  pp.  397  and  611,  supra. 


646  RAILROADS 

upon  the  major  share  of  their  tonnage.  The  profit  of  these 
railways  will  doubtless  for  the  moment  be  lessened;  but  there 
can  be  little  question  that  an  enhancement  of  their  prosperity 
will  follow  in  the  long  run.  The  opening  of  this  great  new 
avenue  of  commerce  by  sea  is  bound  to  stimulate  immensely 
the  growth  and  prosperity  of  the  entire  country.  And  it  is 
beyond  question  that  in  any  such  large  development  in  future, 
they  will  all  share  to  a  large  degree. 


APPENDIX  I 


Chicago 


r-^Princeton 

^ 

^Hnoxville 
9-         Spartdnburg 

/^'^"       Augusta    ( 
\  Macon         ^/r 

/'n/           ^Columbus          / 
Meridian    ^^''"^                             f 

STANDARD   OIL  ROUTING 


Grand  Junction.  Tcnn. 


APPENDIX  II 


APPENDIX  III 


The  following  good  references  on  the  subject-matter  of  chap- 
ter I  wall  be  found  serviceable: 

1907.  Bishop,  A.  L,  The  State  Works  of  Pennsylvania;  Trans., 
Connecticut  Academ}^  of  Arts  and  Sciences,  XIII,  pp.  1-298; 
and  Yale  Review,  1907,  pp.  391-411. 

1904.  Paine,  A.  E.  The  Granger  Movement  in  Ilhnois  (Bibliog- 
raphy); Studies,  University  of  lUinois,  I,  pp.  1-53.  With 
this  should  be  compared.  The  Effects  of  the  Granger  Acts, 
Journal  of  Political  Economy,  1903,  pp.  237-256. 


INDEX 


Accounts,  515,  586  {See  also  Pub- 
licity) 

Act  to  Regulate  Commerce  {See 
contents  of  chapters  as  follows: 
original  law,  XIII;  emasculation, 
XIV;  Hepbiu-n  Amendments,  XV 
and  XVI;  Mann-Elkins  Act, 
XVII;  and  subsequent  details, 
XVIII,  XIX),  congressional  his- 
tory, 450;  outline,  452 

Acworth,  65,  168 

Adams,  H.  C,  44,  515 

Agreements  (»See  Pools) 

Alabama,  and  Federal  laws,  632 

Alabama  Midland  case,  270  (map), 
390,  462,  473,  481,  482  (map) 

Anthracite  coal  {See  also  Coal), 
tonnage  and  ton-mile  revenue, 
1910,  421;   Federal  case,  549 

Arkansas,  and  Federal  laws,  632 

Ashburn  case,  (map)  388 

Atchison,  rebates,  190 

Attorney-General,  570 

Average  train  load  {See  Train 
Load) 

B 

Back  loading  {See  also  Direction), 
287 

Baltimore,  404 

Baltimore  &  Ohio,  railroad,  7,  18; 
car  supply  case,  541 

Banana  rates,  532 

Basing  point  system  {See  also  con- 
tents of  chapter  XI,  South,  etc.), 
compared  with  transcontinental 
basing  line  system,  239;  main 
objections  to,  242;  citation  of 
cases,  380;  economic  defence, 
384 


Basing  points,  enumerated  and 
defined,  383;  distinction  between 
natural  and  artificial,  383,  387 

Beef,  exports  in  1870,  21;  and 
cattle  rates,  139 

Beef  Trust,  550 

Betterments,  83 

Bishop,  A.  L.,  648 

Bituminous  coal  {See  also  Coal), 
tonnage  and  ton-mile  revenue, 
1910,  421 

Blanchard,  S.  R.,  257 

Blanket  rates  {See  Postage  Stamp 
Rates,  Flat  Rates,  etc.),  611 

Board  of  Uniform  Freight  Classi- 
fication, 338 

Bogue  differentials,  162 

Bond,  510 

Bonds,  553,  573 

Books  and  papers  {See  Witnesses) 

Boston,  404 

Boston  &  Albany  Railroad,  11 

Brimson  case,  459 

Brown  case,  459 

Buffalo,  competition  with  Duluth, 
145 

Burnham,  Hanna,  Munger  case,  442 

By-products,  marketing  of,  142 


California,  wheat  and  Kansas  flour, 

138;     raisin    culture    and    rates, 

178;     fruits,    537;     lemon    case, 

592;    coastwise  competition,  607 

Camden  and  Amboy,  450 

Canadian  Pacific  Differentials,  262 

Canadian  railroads,  33,  400 

Canals  {See  also  contents  of  chapter 

XX),  early  interest  in,    2;    early 

construction  of,  3;    in  the  West, 

6,    supersession   in  '70s,  24,  638 


650 


INDEX 


Capital  investment,  as  aflFecting 
operating  costs,  65,  257 

Capitalization,  and  rates,  574 

Capital  stock,  575 

Carload  rates  {See  contents  of  chap- 
ter IX),  few  in  South,  311;  theo- 
retical basis,  326;  mixed,  331, 
340;  in  transcontinental  system, 
398 

Carmack  amendment,  572 

Cars,  larger  in  '80s,  24;  economy  of 
large,  95;  capacity  and  classifica- 
tion, 334;  complaints  as  to 
supply,  527 

Car  supply  cases,  199,  538 

Cartage  case,  191,  257,  464 

Cattle  (See  Texas,  etc.),  exports  in 
1870,  21,  401;  and  beef  rates, 
139;  legislation  as  to  carriage,  443; 
eveners,  445;  rates,  510,  536 

Centralization,  162 

Central  Pacific,  41 

Central  Traffic  Association,  377 

Central  Yellow  Pine  Association 
case,  489 

Chandler,  495 

Chanute,  103 

Charging  what  the  traffic  will  bear 
(See  Value  of  Service) 

Chattanooga  case,  228  (map),  240, 
461,  464,  483 

Cheese,  428 

Chesapeake  and  Ohio  Canal,  5 

Chesapeake  &  Ohio  Railroad 
case,  513 

Chicago  Terminal  Charge  case, 
509 

China,  rates  on,  183 

Cincinnati  Freight  Bureau  case, 
(See  also  Maximum  Freight 
Rate  Case),  248;  as  a  part  of 
southern  problem,  392;  Supreme 
Court  opinion,  469;  Commerce 
Court  revival,  588 

Circuitous  competition,  604 

Cities,  relative  size  in  1850,  12; 
rivalry  between,  127;  competi- 
tion of  large,  278;  location  in 
trunk-line  zones,  368 

Citrus  fruit,  537 


Civil  War,  eflfect  on  transportation, 
16;  primitive  conditions,  17 

Classification  (See  contents  of 
chapter  IX),  and  relativity  of 
rates,  180;  and  use  of  commodity, 
183;  costz).  value  of  service,  183; 
historical  development,  306;  ac- 
cording to  use,  318;  in  practice 
empirical,  319;  and  tariffs  inter- 
lock, 347 

Classification  committees,  conflict- 
ing rules  and  territory,  340 

Coal  (See  also  Commodity  Clause), 
early  shipments  by  river,  14; 
rates,  469,  513,  585 

Coal  Car  cases,  199 

Coastwise  traffic,  274,  608 

Colorado  Fuel  and  Iron  case,  503 

Commerce  Court  (See  contents  of 
chapters  XVII,  XVIII),  566; 
jurisdiction,  568;  docket,  581; 
congressional  history,  582;  In- 
termountain  rate  decision,  620 

Commercial  competition  (See  Com- 
petition OF  Markets),  in  the 
oyster  case,  234;  in  trunk-line 
system,  372 

Commission,  Federal  v.  state,   627 

Commodities,  increase  in  ratings, 
309 

Commodity  clause,  513,  552 

Commodity  rates,  108;  and  law  of 
joint  cost,  266,  322,  324,  606; 
V.  class  rates  in  transcontinental 
traffic,  615 

Common  point  system,  393 

Company  cars,  539 

Competition,  as  affecting  rate 
sheets,  104;  three  sorts  of,  114; 
of  routes,  114;  of  faciUties,  116; 
of  markets,  118;  differences  be- 
tween trade  and  transportation, 
136;  Hadley's  illustration,  164; 
no  abandonment  of  field,  165; 
nature  of,  in  local  discrimination, 
219;  of  routes,  which  fine  makes 
the  rate?  255;  between  eastern 
and  western  cities,  391;  less  for 
passenger  fares,  429 

Competition  of  markets,  two  vari- 


INDEX 


651 


eties  of,  118;  as  applied  to  jobbing 
business,  124;  as  distinct  from 
rivalry  of  routes,  2-42;  in  trans- 
continental rates,  613,  620     • 

Complaints  decline  in  number,  485; 
under  Hepburn  Act,  523;  nature 
under  Hepburn  Act,  526;  none 
too  petty,  531 

Concentration  points,  537 

Conducting  transportation,  in  oper- 
ating costs,  47,  53;  declining  cost 
of,  as  related  to  capital  invest- 
ment, 65 

Conflict  {See  contents  of  chapter 
XX),  of  state  and  Federal  author- 
ity, 631 

Congestion  of  traffic,  in  1903-'05 
and  in  190(>-'07,  62,  80,  548 

Consolidation,  487 

Constitutional  questions,  as  to  Act 
of  'l887,  451;  in  Hepburn  Act, 
502,  506;  as  to  amended  long 
and  short  haul  clause,  603;  as 
to  minimum  rates,  625 

Constructive  mileage,  275 

Cooley,  T.  M.,  140,  456 

Cordele,  Alabama  case,  387 

Corn,  and  flour  rates,  143 

Cost  keeping,  517 

Cost  of  carriage,  by  highway 
heavy,  3;  declining  by  1860,  16; 
as  affected  by  distance  103,  108 

Cost  of  service,  and  value  of  ser- 
vice compared,  166-184;  objec- 
tions to,  169;  but  essential,  170; 
not  mere  distance  important, 
256;  in  coal  cases,  585 

Cotton  piece  goods,  rates,  345,  346, 
348,  400,  536 

Cotton,  rate  controversy  in  1900, 
153;  rates,  356,  384,  401;  ton- 
nage and  ton-mile  revenue,  1910, 
421 

Counselman  case,  458 

Courts,  relation  to  Commission  in 
1887,  453;  original  law,  460; 
unsatisfactory  after  1887  as  to 
evidence,  461;  record  in  appeal 
cases,  463;  judicial  review  in 
1905,  503;   objections  to  judicial 


control,  504;  indefinite  basis  of 
review,  507;  futility  of  procedure, 
562;  new  mode  of  procedure  on 
appeal,  570;  broad  v.  narrow 
review  again,  593 

Coxe  Brothers  Coal  case,  469 

Creameries,  537 

Credit  Mobilier,  450 

Cullom  Committee,  442,  444,  448, 
450 

Cullom,  S.  M.,  495 

Cumberland  Road,  3 

D 

Dairy  products,  537 

Damage  claims,  524,  534 

Danville  case,  227,  483 

Decade  1840-'50,  11;  187O-'80, 
85 

Decentralization,  385 

Delaware  and  Hudson,  554 

Delaware,  Lackawanna  and  West- 
ern Coal  Company,  554 

Density  of  traffic,  86 

Denver,  242 

Des  Moines  Committee,  344 

Detroit,  373 

Differentials  {See  also  contents  of 
chapter  XI),  22;  Bogue,  162,  262, 
361;  Canadian,  400,  404,  579; 
in  Intermountain  rate  cases,  617 

Direction  of  traffic,  287,  374 

Discriminations  {See  contents  of 
chapters  VI  and  VII),  complaints 
in  1887,  445 

Distance,  as  a  factor  in  tariff  con- 
struction, 102;  subordinated  in 
United  States,  133;  disregard  of, 
produces  inelasticity,  161;  sub- 
ordinated to  cost  of  service,  256; 
relative  unimportance,  264;  ex- 
cessive transportation,  277;  at- 
tempt to  reform  southern  system, 
391;  nuUified  in  transcontinen- 
tal rates,  396 

Distributing  business  {See  also 
Jobbing  Business),  in  Texas, 
394 

Dixon,  F.  H.,  499,  506,  625 


652 


INDEX 


Dollar  mark,  575 

Dortmund-Ems  canal,  640 

Dressed  meats,  tonnage  and  ton- 
mile  revenue,  1910,  421 

Duluth,  competition  with  Buffalo, 
145 

Dumping,  158 

Durham,  N.  C,  case,  210 

E 

Earnings,  during  panic  of  1907,  75; 
statistics  of  gross  and  net  since 
1890,  79;  as  affected  by  level  of 
rates,  82;  gross  and  net  com- 
pared, 84;  comparison  with  dec- 
ade 1870-'80,  85;  monthly  varia- 
tion, 100 

Eaton,  J.  S.,  66 

Eau  Claire  lumber  case,  162,  254 

Economic  wastes,  theory  and  prac- 
tice, 268 

Elkins,  S.,  501 

Elkins  Committee,  496 

Elkins  law  (See  contents  of  chapter 
XV),  application  to  Standard  Oil 
cases,  205;  prosecutions  under, 
208;    main  provisions,  493 

Equipment,  supply,  527' 

Erie  Canal,  4,  7,  15;  still  important 
in  1865,  18;  decline  after  1872, 
24;  plans  for  enlargement,  31, 
358 

Erie  Railroad,  early  importance, 
16 

Esch-Townshend  bill,  496 

Eveners,  445 

Evidence  {See  also  Witnesses), 
powers  as  to,  461;  as  to  rebates, 
493;    immunity  bath,  550 

Ex-Lake  grain,  145 

Expedition  Act,  in  1903,  511 

Expenditures  (»See  also  Fixed 
Charges,  Maintenance  of 
Wat,  etc.),  earliest  classification 
of,  44;  primary  division  into 
constant  and  variable,  45,  55; 
revised  grouping  in  1906,  46; 
statistical  distribution,  49;  as 
affected  by  seasons  and  circum- 
stances 56-57;   according  to  na- 


ture of  road,  58 ;  dependent  on  den- 
sity of  traffic,  60;  constant  and 
variable  ever  changing,  61 ;  under 
curtailment  of  traffic,  63;  in- 
separable as  between  freight  and 
passengers,  68 ;  affected  by  better- 
ment charges,  83 

Expenses,  64;  separation  of  freight 
and  passenger,  68;  comparison 
with  tonnage  and  revenue,  80 

Export  grain,  beginning  after  Civil 
War,  18;  after  1870,  20;  via  Gulf 
ports,  31 

Export  rates,  on  wheat  and  flour, 
135,   404-406 

Exports  (*See  Beef,  Cattle,  Wheat, 
etc.) 


Facilities,  competition  of,  116 
Federal  authority  {See  contents  of 

chapter  XX) 
Federal  courts  {See  Courts) 
Fertilizer  rates,  535 
Fines,  451,  493,  513 
Fink,  Albert,  357,  367,  446 
Fixed    charges,    45;     v.    operating 

expenses,  257 
Flat  rates,  example,  127;    evils  in, 

132,  243-247 
Flour,   and  wheat  rates,    135;    for 

export,  135;   domestic,  138;   and 

corn,  143 
Foraker,  J.  H.,  501 
Fort  Worth,  394 
Fourteenth  Amendment,  619 
Freight  tonnage  (.See  Tonnage) 
Fuel  cost,  59 
Fm-niture  rates,  621 

G 

Galveston,    31,   32,    33,   394,    437; 

cotton  meal  case,  186 
General  Expenses,  48,  54 
Georgia  Railroad  Commission  cases, 

240 
Germany,  unified  operation  in,  294, 

640 
Glass,  351,  528 


INDEX 


653 


Goodrich  Transit  Co.,  case,  586 
Gould-Huntington,  agreement,  447 
Gould,  Jay,  in  1S66-1869,  17,  28 
Grain  elevator  cases,  211 
Grain  rates  (See  Corn,  Wheat,  etc.), 

402 
Grain,  tonnage  and  ton-mile  revenue, 

1910,  421 
Grand  Junction,  Tennesee,  case,  203 
Grand  Trunk  Railway,  33,  432 
Granger  movement,  443,  628,  648 
Great  Western  Railroad,  434 
Green  lines,  12,  15 
Gross  Revenue  (See  Earnings),  79 
GuK  Ports,  437 

H 

Hadley,  A.  T.,  105,  164,  217,  573 

Hai'lan,  Justice,  465 

Harriman,  E.  H.,  490,  551 

Harriman  system,  547 

Hay,  tonnage  and  ton-mile  revenue, 
1910,  421 

Hearst  case,  549 

Hepburn  Act  (See  contents  of 
chapters  XV  and  XVI),  con- 
gressional history,  497;  provi- 
sions, 499;    effects,  522 

(Hepburn)  Committee,  445,  447 

Hides,  320 

Highways,  early  interest  in,  2 

Hill  Lines,  547 

Hillsdale  ice  case,  221  (map) 

Hogs,  401 

Hoosac  Tunnel,  18 

Household  goods,  350 

Houston,  394 

Huebner,  627,  630 

Hutchinson  salt  case,  195 


Illinois    Central    car    supply    case, 

538,  568 
Illinois  Central  Railroad,  construc- 
tion, 14 
Immunity  Bath,  550 
Import  rates,  406,  409,  438,  464 
Imprisonment,  451,  493,  513 
Improvements,  in  operation,  93 
Increasing  retiu-ns,  law  as  applied 


to  railroads,  71-75;  law  of, 
quahfied,  76;  as  tested  practically, 
77;  law  of,  obscured  since  1906, 
84;  final  conclusion  as  to,  98 

Industrial  Combinations,  and  re- 
bates, 213,  491 

Industrial  railroads  (See  also  Ter- 
minal Railroads),  195,  212-213, 
512 

Injunction,  561,  562,  569,  586,  633, 
634 

Ink,  302 

Intermountain  rate  case  (See  also 
Transcontinental  Rates  and 
contents  of  chapter  XIX),  610; 
history,  614;  new  orders,  616; 
Commerce  Court  opinion,  620 

Internal  waterways  {See  also  con- 
tents of  chapter  XX,  Canals, 
Rivers,  etc.),  640 

International  Harvester  case,  196 

Interstate  Commerce  Act  (See  Act 
TO  Regulate  Commerce) 

Interstate  Commerce  Commission 
(See  also  chapters  XIV,  XV,  XVI, 
XVII,  XVIII,  XIX,  Courts, 
Procedure,  etc.),  reduction  in 
tariffs  filed,  324;  created  by  law, 
453;  record  on  appeal  cases,  460; 
rate-making  power  demanded, 
468;  complaints  analyzed  since 
1906,  526;  dissenting  opinions  in 
Shreveport  case,  636 

Intrinsic  reasonableness,  622 

Iowa  Development  Company,  434 

Iron  p;yTites,  536 

Iron  rates,  399 


Jobbing  business,  market  competi- 
tion in,  124;  car  load  rates,  327- 
329;  in  the  South,  384;  decen- 
tralization, 385;  in  transconti- 
nental rates,  397;  and  Pacific 
rates,  616 

Joint  cost,  67;  two  limitations  upon 
the  law,  265 

Joint  Rate  Committee,  367 

Joint  rates,  529 

Judicial  review  (See  Courts) 


654 


INDEX 


K 

Kansas,  wheat  and  California  flour, 
138;  meal  and  Texas  corn,  143 

Keeping  everyone  in  business,  119, 
149 

Kentucky  and  Indiana  Bridge  case, 
461 

Kindel  ease,  399 

L 

La  Follette,  498,  559,  629 

Lake  Shore  road,  419 

Lake  trafiic,  358 

Lakes  to  the  Gulf  canal,  638 

Land  grants,  Illinois  Central,  14; 
others,  35 

Lemons,  rates  on,  345,  537;  rate 
case,  592 

Lighterage  cases,  586 

Lime,  rates,  336 

Lincoln,  Nebraska,  case,  147 

Live  stock  (See  also  Cattle,  etc.), 
tonnage  and  ton-mile  revenue, 
1910,  421 

Local  Discrimination  (See  contents 
of  chapters  VII  and  XIX  and  also 
Long  and  Short  Haul  Clause), 
definition,  215;    before  1887,  448 

Local  rates,  in  the  South,  383;  in 
Texas,  394;  and  revenue  per  ton 
mile,  421;  reduced  after  1887, 
456,  591;  the  Shreveport  case, 
635 

Local  traffic,  as  affecting  averages, 
91;  proportion  of,  259;  in  basing 
point  system,  385 

Locomotives,  24;  increased  power 
of,  94 

Logging  in  transit,  401 

Long  and  Short  haul  clause  (See 
Local  Discrimination  and  also 
contents  of  chapter  XIX),  tariff 
structure,  obviating  waste,  295; 
final  text,  452,  565;  congressional 
history,  473;  EngUsh  cases,  473; 
emasculation  by  courts,  476; 
amendment  in  1910,  564 

Long  line,  defined,  256;  competi- 
tion, 604 


Louisiana  rates,  634 
Louisville  &  Nashville,  590 
Louisville   &    Nashville   case,    223, 

244,  296,  474,  479 
Louisville  Properties  Company,  556 
Lumber,  competitive  rates  for,  142; 

and  wood  pulp  rates,   148,   181; 

tonnage    and    ton-mile    revenue, 

421;  stakes,  533 
Lumber  rates.   Pacific  coast  cases, 

150,  535,  543,  581;  tap  hne  case, 

212;  logging  in  transit,  401;  from 

Georgia,  489 

M 

MacGraham,  360 

Maintenance  of  Equipment,  47,  52; 
64 

Maintenance  of  Way,  expenses 
analyzed,  47,  51,  74 

Mann-Elkins  Act  (See  contents  of 
chapter  XVII),  congressional  his- 
tory, 558;    provisions,  562 

Manufactures,  westward  drift  in 
'80s,  30 

Market,  definition  of,  119 

Markets,  competition  of,  118,  605; 
consuming  capacity  as  affecting 
carload  rules,  336 

Massachusetts  Railroad  Commis- 
sion, 627,  629 

Maximum  Freight  Rate  case  (See 
also  Cincinnati  Freight  Bureau 
Case),  248,  469-473,  502 

Maximum  rates,  constitutionahty 
of,  623;  state  laws,  630 

Memphis,  403 

Meyer,  B.  H.,  495,  629 

Meyer,  H.  R.,  385 

Middlemen  (<Sf'e  Jobbing  Business) 

Midnight  tariffs,  197 

Mileage,  statistics  since  1890,  79 

Milk  rate  cases,  in  New  York,  243, 
255;  in  New  England,  329 

Mining  in  transit,  402 

Minimum  carload  rates  (See  con- 
tents of  chapter  IX),  332 

Minimum  rates,  254,  624 

Minnesota,  and  Federal  laws,  632 

Misquotation  of  rates,  571 


INDEX 


655 


Misrouting,  527 

Mississippi  river,  tonnage  on  1845, 

13;  declining  traffic  in  'SOs,  26 
Missouri,   carload  minimum  rates, 

335;   and  Federal  laws,  632 
Missouri-Mississippi    rate    scheme, 

128,  442,  543 
Mixed  carloads,  331,  340 
Monopoly,  resulting  from  rebates, 

187;   distrust  of,  in  1887,  446 
Montgomery,   Alabama,   case,    590 

(map) 
Morawetz,  V.,  165 
Munn  case,  452 

N 

Nashville,  342 

Nashville  Grain  Exchange,  587 

Natural  market  and  territory,  158 

Net  Earnings  {See  Earnings),  79 

Nevada,  611 

NewconJb,  H.  T.,  73 

New  England,  oil  rates,  202;  milk 
rates,  329;  common  point  sys- 
tem, 395 

New  Orleans,  31,  32,  33,  437 

New  York  Board  of  Trade  case, 
306,  325,  407 

New  York  Central  raikoad,  con- 
struction, 15;  importance  in  '80s, 
30;  compared  with  Pennsylvania 
Railroad,  58 

New  York  city  {See  also  Differ- 
entials, Exports,  etc.),  impor- 
tance in  export  trade,  30;  su- 
premacy threatened,  31 

Nickel  Plate  line,  29 

North  Carolina,  and  Federal  laws, 
632 

Northern  Pacific  railroad,  28 

O 

Official  classification  committee,  304 
Ohio  river,  tonnage  in  1845,  13 
Open  car  system,  330 
Operation  {See  also  Expenditures, 

etc.),  improvement  in   '80s,    23; 

recent  technical  improvements  in, 

93;  in  1910,  597 


Orange  rates,  345,  471,  537 
Orange  Routing  case,  546,  572 
Osborne  case,  476 
Oyster  case,  217 


Pacific  coast  {See  also  Transcon- 
tinental Rates,  etc.),  early 
trade  with,  19;  rapid  develop- 
ment in  '80s,  28;  lumber  cases, 
150;   routes  by  sea  and  rail,  276 

Panama  Canal,  638,  643 

Panic,  of  1857,  16;  of  1907,  75;  of 
1893,  433 

Par  value,  575 

Parallelling,  29 

Passenger  traffic,  429,  609 

Passes,  512 

Pennsylvania,  internal  improve- 
ments, 8;   state  works,  648 

Pennsylvania  Railroad,  8,  11;  il- 
lustration of  theory  of  rates,  62; 
coal  supply  scandals,  199;  and 
steel  companies,  556 

Performance,  of  equipment  im- 
proved, 96 

Periodicity  of  expenditures,  61 

Personal  Discrimination  {See  con- 
tents of  chapter  VI),  185;  philos- 
ophy of,  185;  as  creating  mo- 
nopoly, 187-189;  distinction  from 
general  rate  cutting,  188 

Philadelphia  {See  Differentials, 
Exports,  etc.),  404 

Physical  valuation,  518 

Pools,  before  1887,  23,  446;  obvi- 
ating waste,  293;  prohibited,  453, 
579;  after  1887,  457 

Population,  westward  drift  in  '80s, 
30 

Portland  Gateway  case,  547,  572 

Portland,  Oregon,  608 
"Postage-stamp  rates"   (<See  Flat 

Rates),  397,  611 
Powder  Trust,  571 
Prices,  and  rates,  172,  430,  471,  510, 

587,  597 
Primary    commercial    competition, 

121 
Private  car  lines,  140,  192 


656 


INDEX 


Procedure  {See  Courts,  Witnesses, 
etc.,  and  also  Commerce  Court), 
under  Hepburn  Act,  505,  511 

Proctor  and  Gamble  case,  584 

Produce  Exchange  case,  405 

Pro-rating,  281,  514,  529,  543,  547 

Public  aid,  35 

Publicity,  515,  574 

Pueblo,  399 

Pulp  rates,  148 

R 

Railroad  Construction,  early  in 
southern  states,  9;  sudden  ex- 
pansion in  1848,  13;  new  north 
and  south  lines,  14;  decline  dur- 
ing Civil  War,  16;  rapid  during 
the  '70s,  18;  climax  in  '80s,  27; 
since  1890,  34;  comparison  with 
Europe,  35 
Railroad  mileage  (See  Mileage) 
Rails,  steel  introduced,  17,  24,  93 
Rate  advances,  complaints  since 
1906,  534;  suspension  in  1910, 
561 
Rate-making  power,  467,  468;  under 
Hepburn  law,  500;  constitutional 
aspects,  502,  506;  suspension  of 
tariffs,  560 
Hates  [See also  Prices,  etc.,  and  con- 
tents of  chapter  XII),  decline  in 
'70s,  21;  intricacy  of,  134;  on  raw 
and  finished  materials,  134;  ex- 
port wheat  and  flour,  135 ;  domes- 
tic wheat  and  flour,  138;  beef 
and  cattle,  139;  as  between  by- 
products, 142;  cases  of  substitu- 
tion, 143;  general  protective  pol- 
icy, 146;  under  changing  con- 
ditions, 147;  insurance  function, 
149;  elasticity  of,  152;  rigidity, 
153;  as  promoting  economic  un- 
rest, 156;  stabihty  desirable,  157; 
use  of  classification  in  advances, 
301;  growing  distinction  between 
C.  L.  and  L.  C.  L.,  310;  lime,  336; 
glass,  351;  trunk  line  system, 
354;  cotton,  3.56;  high  level  in 
the  South,  382;  no  demand  for 
reduction  in,  1887,443;  movement 


since  1870,  411;  actual  index,  426; 
and  prices,  430,  471,  510,  528;  rise 
of,  488,  534;  and  capitalization, 
574;  advances  of  1910,  594;  ab- 
solute V.  relative,  623;  prescribing 
minimum,  624 

Rate  wars  (<S'ee  contents  of  chapter 
XII),  during  the  '70s,  22;  during 
the  '80s,  23;  dressed  beef,  33; 
historical  survey  of,  431 

Reagan,  Judge,  444,  450 

Reasonable  rates  {See  contents  of 
chapter  VII),  588;  in  Inter- 
mountain  rate  case,  622 

Rebates  (*See  Personal  Discrimi- 
nation and  also  Elkins 
Amendments),  185,  280,  286; 
Standard  Oil  cases,  446;  novelty 
of  prohibition,  454;  first  prosecu- 
tions after  1887,  457,  512 

Red  Rock  Fuel  case,  199 

Refrigerator  cars,  140 

Rentals,  534 

Reports  {See  Accounts),  519 

Restrictive  Rate  case,  585 

Revenue  {See  Earnings),  and  rates 
in  1910,  599 

Revenue  per  ton  mile  {See  contents 
of  chapter  XII),  decline  during 
rate  wars,  23;  as  related  to  earn- 
ings and  expenses,  85,  99;  Dilution 
of,  289;  how  computed,  412; 
advantages,  414;  on  different 
roads,  415;  as  influenced  by 
nature  of  traffic,  416;  as  affected 
by  distance,  421;  and  volume  of 
traffic,  423 

Review  by  courts  {See  Courts) 

Rice  cases,  446 

Rivers  {See  contents  of  chapter 
XX),  early  improvement  of,  3; 
still  important  in  1850, 12;  tonnage 
in  1845,  13;  declining  importance 
in  '70s,  26,  382;  competition  in 
the  South,  386,  640 

Rockefeller,  John  D.,  445 

Roosevelt,  President,  486,  496 

Roundabout  routing,  116,  269 

Routes,  competition  of,  114;  new 
law  as  to,  572 


INDEX 


657 


Routing  (See  also  contents  of  chap- 
ter VIII),  complaints,  530,  546 

Rules,  growing  complexity  in  classi- 
fication, 312 

S 

St.  Cloud  case,  (map)  235 

St.  Louis  Business  Men's  League 
case,  125,  241,  246,  398 

St.  Louis,  rates  under  three  classifi- 
cations, 348 

Salt  Lake  City,  400,  611 

Savannah  Fertihzer  case,  224 

Savannah  Naval  Stores  case,  (map) 
484 

Sax,  168 

Scientific  Management,  517,  598 

Seaboard  differentials  {See  Differ- 
entials), 404 

Secondary  commercial  competition, 
122 

Securities  Commission,  573 

Sherman  Anti-Trust  Act,  561,  579 

Shoes,  320 

Short  line,  defined,  256 

Shreveport,  Louisiana,  case,  635 

"Similar  circumstances  and  condi- 
tions" {See  Long  and  Short 
Haul  Clause),  475 

Smalley,  H.  S.,  499,  507,  625 

Social  Circle  case,  380,  462,  464, 
468,  478 

South  (See  contents  of  chapter  XI), 
system  of  rates  into,  248;  high 
local  rates,  260;  classification 
conditions,  311;  commodity  rates, 
323;   jobbers  in,  327 

South  CaroUna  Railroad  tariff,  307 

Southern  Basing  Point  (See  Basing 
Point  System) 

Southern  Classification  (See  con- 
tents of  chapter  IX) 

Southern  Classification  Committee, 
304 

Southern  Pacific  Railroad,  con- 
struction, 28;  water  competition, 
1912,  607 

Southern  Railway  &  Steamship 
Association,  23 

Special  rates  {See  also  Commodity 
VOL.  1-42 


Rates),  as  distinct  from  class 
rates,  113;  and  joint  cost,  266,  280 

Speculation,  rampant  in  '80s,  29 

Spokane,  226,  303,  611 

Standard  Oil  Company,  rebates  on 
tank  cars,  192;  allowances  on 
sale  of  suppHes,  198;  later  forms 
of  rebates,  198,  200,  200-206, 
445,  491 

State  railroad  commissions,  574,  627 

Stock,  552,  573 

Stock-watering,  444,  448 

Stockwatering  laws,  576 

Storage,  191 

Subsidies  and  pubUc  appropria- 
tions, 37 

Sugar,  rate  war,  439;  rates,  586 

Sunday  Creek  Coal  case,  209 

Supreme  Court  (See  also  Courts), 
delay  in  appeal  cases,  461; 
divided  opinions,  464 

Surplus,  statistics  since  1890,  80 

Suspension  of  rates,  561 


Taft,  President,  559 

Tank  cars,  192 

Tap  fine  decision,  212 

Tarbell,  Miss,  491 

Tariffs,  construction  of,  101;  too 
complex  and  numerous,  155; 
concealment  of  rebates  in,  198; 
as  distinct  from  classification, 
301;  classification  as  affecting, 
321;  reduction  in  number  filed, 
324;  as  interlocked  with  classifica- 
tion, 347;  and  rates,  407;  new 
law  concerning,  571 

Taussig,  F.  W.,  67 

Tax,  economic  waste,  291 

Telegraph  companies,  572 

Telephone  companies,  572 

Terminal  cost,  101 

Terminal  railways,  as  means  of 
rebating,  195;  complicated  phases 
of,  213,  512 

Testimony  (See  Witnesses) 

Texas  Cattle  Raisers  case,  70,  167, 
567 


658 


INDEX 


Texas,  cornmeal  and  Kansas  corn, 
143;  rate  system,  393,  635 

Theory  {See  contents  of  chapters 
II  and  III),  of  classification,  314 

Through  freight  hnes,  23 

Through  rates,  359,  442,  529,  587, 
588 

Tobacco,  384 

Tobacco  Trust,  210 

Ton  mileage,  statistics  since  1890, 
78 

Ton-mile  revenue  (See  Revenue 
Per  Ton  Mile),  364 

Tonnage,  statistics  since  1890,  77; 
distribution  by  years,  417;  in- 
creasing diversification,  418;  clas- 
sified for  1909,  420 

Traffic  Density  {See  Density  of 
Traffic),  86 

Traffic  Expenses,  48 

Traffic  (See  Tonnage),  trunk  line 
conditions  in  1882,  357;  nature 
of,  as  affecting  ton-mile  revenue, 
416;   by  Panama  canal,  643 

Train  load,  88;  Umit  to  economy  of, 
92 

Train  mile,  cost  and  revenue  per, 
98 

Transcontinental  classification  com- 
mittee, 304 

Transcontinental  rates  (See  con- 
tents of  chapters  XI  and  XIX), 
rigidity,  154;  compared  with 
basing  point  system,  239,  245; 
general  high  level,  396;  de- 
moralization after  1893,  433; 
commodity  v.  class  rates,  615; 
future  traffic,  643 

Troy  case  (See  Alabama  Midland 
Case),  (map)  270,  390,  462,  (map) 
481 

Trunk  Line  Rate  System  (See  con- 
tents of  chapter  X),  as  related  to 
separate  line  tariffs,  111 

Trusts,  and  rebates,  213;   491,  571 

Two-for-one-rule,  343 

U 

Underclassification,  190 

Uniform  classification  (See  contents 


of  chapter  IX),  338;  objections 

and  advantages,  345 
Uniform  Classification  Committee, 

339 
Union  Pacific  Railroad,  19,  40 
Union  Stockyards  Company,  587 


Valuation,  518 

Value  of  service,  and  cost  of  service 
compared,  166-184;  objection  to, 
172;  dynamic  force  in,  177;  in- 
adequate alone,  179;  in  classifi- 
cation, 315;   in  coal  cases,  585 

Vanderbilt,  Commodore,  450 

Volume  of  traffic  (See  Tonnage, 
etc.),  as  an  element  in  cost,  261 

W 

Wabash,  St.  Louis,  &  Pacific  Rail- 
way case,  451 

Wages,  518 

Wagons,  109,  621 

Wars  (See  Rate 'Wars) 

Waste  (See  contents  of  chapter  VIII, 
in  transportation,  268;  six  causes 
of,  280;  five  results,  288;  remedy 
for,  292 

Water  carriage,  circuitous  routing, 
273;  cost  compared  with  rail, 
638;    controlled  by  railways,  641 

Water,  carriers,  failure  to  regulate, 
579 

Water  competition,  by  coastwise 
steamers  to  Chattanooga,  232, 
359,  475;  in  the  South,  382,  385, 
387,  392;  by  sea  in  Pacific  coast 
traffic,  396;  new  law  covering, 
566,  591;  and  new  long  and  short 
haul  clause,  606;  neutrahzed  in 
Pacific  rates,  612;  v.  market 
competition  in  Pacific  cases,  620 

Waterways  (See  contents  of  chap- 
ter XX  and  also  Canals,  Riv'ers, 
etc.),  638 

West,  classification  conditions,  311 

Western  &  Atlantic  road,  12 

Western  classification  committee, 
304 

West  Shore  railroad,  29 


INDEX 


659 


What  the  traffic  will  bear  (.See 
Value  of  Service),  illustrated 
by  rate  sheets,  107 

Wheat,  and  flour  rates,  for  export, 
135;   domestic,  138;  rates,  467 

Wichita  cases,  232 

Willamette  lumber  case,  535,  545 

Windom  Committee,  442,  443,  446, 
447 

Wisconsin,  Two  Cent  Fare  decision, 
69;  investigation  as  to  rebates, 
206;    the  "Wisconsin  idea,"  629 


Witnesses,  451,  455,  457,  549 
Wooden  pipe  rates,  303 
Wool  rates,  333,  352,  401 


Youngstown  case,  223,  244,  296,  480 


Zone  rates,  trunk  hne  territory, 
(map)  365;  transcontinental, 
(map)  618 


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